4 )Maggie\'s Muffins, Inc., generated $4,000,000 in sales during 2013, and its y

Question

4 )Maggie's Muffins, Inc., generated $4,000,000 in sales during 2013, and its year-end total assets were $2,600,000. Also, at year-end 2013, 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 2014, 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 65%. 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 steps. Round your answers to the nearest whole.

Explanation / Answer

AFN = (A*/S0)?S - (L*/S0)?S - MS1(1 - d)

where A* = Current level of assets = $2,600,000

So = Sales = $4,000,000

?S = Change in sales = (S1 - So) = (S1 - $4,000,000)

L* = Current level of liabilities (Spontaneous liabilities increased by sales) = $500,000 assuming only accounts payable is a spontaneous liability (In absence of information)

M = Profit margin = 7%

S1 = New sales = S1

d = dividend ratio = 0.65

AFN = (A*/S0)?S - (L*/S0)?S - MS1(1 - d)

AFN = ($2,600,000/$4,000,000)(S1-$4,000,000) - ($500,000/$4,000,000)(S1-$4,000,000) - 0.07xS1(1-0.65)

Since the Additional Funds are not required, we put the AFN = 0

(Converting all figures in millions)

0 = 2.6/4(S1 - 4) - 0.5/4 (S1 - 4) - (0.07x0.35xS1)

0 = 0.65 S1 -2.6 - 0.125 S1 + 0.5 - 0.0245 S1

2.1 = 0.5005 S1

S1 = $ 4.195804 mn or $ 4,195,804

Sales Increase = $4,195,804 - $4,000,000

Sales Increase = $195,804

Self supporting Grwoth rate = Change in sales/ original sales

Growth rate = $195,804/$4,000,000

Growth Rate = 4.8951% or 5%

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