Nassin Inc. generated $4,000,000 in sales during 2015, and its year-end total as

Question

Nassin Inc. generated $4,000,000 in sales during 2015, and its year-end total assets were $3,000,000. Also, at the end of the year, current liabilities were $1 million, consisting of $400,000 of notes payable, $400,000 of accounts payable and $200,000 of accruals. Looking ahead to 2016, 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 profits will be 10%, and its payout ratio will be 70%. How large a sales increase can the company achieve without having to raise funds externally; that is, what is the self-supporting growth rate?

Explanation / Answer

Answer:

Step 1: Calculation of self-supporting growth rate

Formula:Self-supporting growth rate =M (1-POR) (S0)/A0 – L0 – M (1-POR) (S0)

Where:

M = Net Income/Sales = 10%

POR = Payout ratio = 70%

S0 = Sales = $4,000,000

A0 = $3,000,000

L0 = Spontaneous liabilities = $400,000+$200,000=$600,000 [only the accounts payable and accruals are considered spontaneous liabilities]

Substituting in the above equation, we get:

.10 (1 - .70) (4,000,000)/3,000,000-600,000 - .10(1-.70)(4,000,000)

=120,000/3,000,000 – 600,000 – 120,000

=120,000/2,280,000

=5.26316%

Therefore, the self-sustaining growth rate is 5.26316%.

Step 2: Calculation of “how large a sales can increase” amount:

Sales amount * Self-sustaining growth rate

=$4,000,000 * 5.26316%

=$210,526.4

Therefore, sales can increase by $210,526.4.

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