Maggie\'s Muffins, Inc., generated $2,000,000 in sales during 2015, and its year

Question

Maggie's Muffins, Inc., generated $2,000,000 in sales during 2015, and its year-end total assets were $1,400,000. Also, at year-end 2015, 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 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 profit margin will be 3%, 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.

Sales can increase by $  , that is by  %.

Explanation / Answer

As its assets must increase at the same rate as sales, its spontaneous liabilities will increase at the same rate as sales and also the equity since here we assume Company has no initial external financing(debt and external equity).

Therefore,Assets=current liabilities+equity =>equity =Assets-current liabilities=1400000-1000000=400,000

sales=2000000

We know self-supporting growth rate= Return on Equity*(1-payout ratio)

Return on Equity=Net Income/equity=(Net Income/sales)*(sales/equity)=profit margin*(sales/equity)

Thus  ,self-supporting growth rate= profit margin*(sales/equity)*(1-payout ratio)

put all the given values in above formula,

self-supporting growth rate= 3%*(2,000,000/400,000)*(1-.65)

self-supporting growth rate= 5.25%.Sales increase=5.25% of $2,000,000=105000

Sales can increase by $105,000  , that is by  5.25%.

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