Question

Paladin Furnishings generated $4 million in sales during 2016, and its year-end total assets were $3 million. Also, at year-end 2016, current liabilities were $500,000, consisting of $200,000 of notes payable, $200,000 of accounts payable, and $100,000 of accrued liabilities. Looking ahead to 2017, the company estimates that its assets must increase by $0.75 for every $1.00 increase in sales. Paladin's profit margin is 6%, and its retention ratio is 30%. How large of a sales increase can the company achieve without having to raise funds externally? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Do not round intermediate calculations. Round your answer to the nearest cent.

Answer 1

Answer:

Data:

Sales 2016	$4 million
Total Assets 2016	$3 million
Current Liabilities 2016	$500,000
Notes payable	$200,000
Accounts payable	$200,000
Accrued liabilities	$100,000
Projected increase in assets 2017	$0.75 for every $1.00 increase in sales
Profit margin 2016	6%
Retention ratio 2016	30%

Workings 1:

Sales:	$ 4,000,000.00
Profit=(Sales x 6%):	$             240,000
Total Assets:	$           3,000,000
ROA(%)=(Profit/Total Assets):	8.00%
RR(Retention Ratio):	30%
ROA X RR:	2.40%
100%-2.4%:	97.60%
Internal Growth Rate=(ROA X RR)/(100%-2.4%)	2.46%
Sales Increase=Sales X Internal Growth Rate	$                 98,361

Workings 2:

Projected increase in assets 2017

$0.75 for every $1.00 increase in sales

Increase in Assets=$98,361 x 0.75:	$              73,770
Total Sales after increase=$4,000,000+$98,361:	$        4,098,361
Profit=Total Sales after increase x 6%:	$          245,902
Retained Earnings=Profit X RR(30%):	$              73,770
External Fund Need=Increase in Assets-Retained Earnings:	$                       -

Question:How large of a sales increase can the company achieve without having to raise funds externally?

Answer: $98,361 increase in sales without external fund & Increase in total assets equal to increase in retained earnings.