Help, this question has been asked before on Textbook help and individually, but

Question

Help, this question has been asked before on Textbook help and individually, but what the other students are getting do not match. Looking to verify...Bannister Legal Services generated $2 million in sales during 2010, and its year-end total assets were $1.5 million. Also, at year-end 2010, current liabilities were $500k, consisting of $200k in notes payable, $200k in accounts payable and $100k in accruals. Looking ahead at 2011, 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? Thanks in advance!

Explanation / Answer

The difference in answer could be attributable to the assumptions taken for every solution.

Difference in assumption will lead to different answers.

Assuming that  the liabilities that vary with sales are only accounts payable and accruals. Current liabilities and notes payable are assumed not to vary with sales, then the solution to the problem will be as follows:

AFN equation= (A*/So)^S-(L*/So)^S - MS1(1-d)

Where,

A = Total assets

S0 = sales at the ned of year 2015

L = liabilities

M= Marhin of profit

D= Dividend pay out ratio

S1 = sales at the end of year 2015

AFN equation, substituted with the numbers from the problem:

0 = 1,500,000/2,000,000* (s1 -2,000,000)

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