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Maggie's Muffins, Inc., generated $2,000,000 in sales during 2013, and its year-end total assets were $1,400,000. 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 5%, 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 steps.
Round your answers to the nearest whole. Sales can increase by $ ________ , that is by ________ %.
Explanation / Answer
AFN = (A/S0)S–(L/S0)S–MS1(RR)
A- Assets tied directly to sales
L-spontaneous liabilities that are affected by sales
S0=the previous year's sales
S1=total projected sales for next year
S=the change in sales between S0 and S1
MS1=projected net income
RR=the retention ratio from net income
AFN = (A/S0)S–(L/S0)S–MS1(RR)
$0 = (A/S0)×(S1-S0)–(L/S0)×(S1-S0)–MS1(RR)
$0 = ($1,400,000/$2,000,000)×(S1-$2,000,000)-(($500,000+$200,000)/$2,000,000)×(S1-$2,000,000)-S1×5%×(1-45%)
$0 = 0.70×S1-$1,400,000-0.35×S1-$1,400,000-S1×2.75%
$2,800,000 = 0.70×S1-0.35×S1-S1×0.0275
$2,800,000 = 0.3225×S1
Sales in 2014, S1 = $8,682,171
Sales can increase by $6,682,171 that is by 334.11%
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