Question

Maggie's Muffins Bakery generated $2,000,000 in sales during 2016, and its year-end total assets were $1,100,000. Also, at year-end 2016, current liabilities were $1,000,000, consisting of $300,000 of notes payable, $500,000 of accounts payable, and $200,000 of accruals. Looking ahead to 2017, 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 5%, and its payout ratio will be 60%. 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. Round your answers to the nearest whole. Sales can increase by ( $ ), that is by ( % ).

Answer 1

Self-supporting growth rate = [M * (1 - POR) * S0] / [A0 - L0 - {M * (1 - POR) * S0}]

Where:

M = Net Income/Sales = 5%

POR = Payout ratio = 60%

S0 = Sales = $2,000,000

A0 = $1,100,000

L0 = Spontaneous liabilities = $500,000 + $200,000 = $700,000

Self-supporting growth rate = [0.05 * (1 - 0.60) * $2,000,000] / [$1,100,000 - $700,000 - {0.05 * (1 - 0.60) * $2,000,000}]

= $40,000 / [$400,000 - $40,000]

= $40,000 / $360,000 = 0.1111, or 11.11%

Increase in sales = S0 * Self-supporting growth rate

= $2,000,000 * 0.1111 = $222,222.22, or $222,222