Paladin Furnishings generated $2 million in sales during 2016, and its year-end total assets were $1.6 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 $0.80 for every $1.00 increase in sales. Paladin's profit margin is 7%, and its retention ratio is 35%. 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. $
The computation of sales increase that the company can achieve without having to raise funds externally is computed as shown below:
Self sustaining growth rate is computed as shown below:
= ( Profit margin x retention ratio x sales ) / (Total Assets - Accounts payable - Accrued liabilities - profit margin x retention ratio x sales )
= ( 0.07 x 0.35 x $ 2,000,000 ) / ( $ 1,600,000 - $ 200,000 - $ 100,000 - 0.07 x 0.35 x $ 2,000,000 )
= 3.916866507%
So, the sales amount will be:
= Sales x 3.916866507%
= $ 2,000,000 x 3.916866507%
= $ 78,337.33 Approximately
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