Question

eBook Self-Supporting Growth Rate Maggie's Muffins Bakery generated $4 million in sales during 2019, and its year-end total assets were $2.8 million. Also, at year-end 2019, current abilities were $1 million, consisting of $300,000 of notes payable, $500,000 of accounts payable, and $200,000 of accruals. Looking ahead to 2020, the company estimates that its assets must increase at the same rate as sales, its spontaneous liabilities will increase at the same rate as sales, its profit margin will be 7, and its payout ratio will be 45%. How large a sales increase can the company achieve without having to raise funds externally--that is what is its self-supporting growth rate? Do not round Intermediate calculations. Enter your answer for sales increase in dollars. For example, an answer of $2 million should be entered as 2,000,000. Round the monetary value to the nearest dollar and percentage value to one decimal place. Sales can increase by $

Answer 1

Sales (S0) = $4,000,000
Assets (A0) = $2,800,000
Spontaneous liability (L0) = $500,000 + $200,000 = $700,000.
Profit margin (M) = 7%
Payout ratio = 45%

A0 / S0 = $2,800,000 / $4,000,000 = 0.7

L0 / S0 = $700,000 / $4,000,000 = 0.175

Change in sales = S1 - S0 = S1 - $4,000,000

AFN = (A0/S0) * Change in sales - (L0/S0) * Change in sales - M * S1 * (1 - Payout ratio)

0 = 0.7 * (S1 - $4,000,000) - 0.175 * (S1 - $4,000,000) - 0.07S1 * (1 - 0.45)

0 = 0.7S1 - $2,800,000 - 0.175S1 + $700,000 - 0.0385S1

0 = 0.4865S1 - $2,100,000

0.4868S1 = $2,100,000

S1 = $2,100,000 / 0.4865

S1 = $4,316,547

Increase in sales = S1 - S0 = $4,316,547 - $4,000,000 = $316,547

Percentage increase = Change in sales / S0
= $316,547 / $4,000,000
= 7.9%

Sales can increase by $316,547 that is by 7.9%