planning for the upcoming year, but does not wish to raise external capital to o

Question

planning for the upcoming year, but does not wish to raise external capital to operating at full capacity and the data for the most recent year is presented 4. Hargrave and Houston, Inc. is upcoming year fund sales growth. The firm is below (all dollars are in millions). Sales (So) Total Assets (Ao) Profit Margin $400 Accounts Payable $650 Notes Payable 20% Accruals $50 $15 $20 2096 Payout Ratio What percentage g funds? a. 2.30% b. 9.85% c. 12.40% d. 15.10% rowth in sales for the upcoming year can be supported using only internally generated

Explanation / Answer

Sales (S0) = $400
Total Assets (A0*) = $650
Profit Margin, M = 20%
Payout Ratio = 20%

Retention Ratio, b = 1 - Payout Ratio
Retention Ratio, b = 1 - 0.20
Retention Ratio, b = 0.80

Spontaneous Liabilities, L0 = Accounts Payable + Accruals
Spontaneous Liabilities, L0 = $50 + $20
Spontaneous Liabilities, L0 = $70

Substantial Growth Rate = [S0 * M * b] / [A0* - L0 - (S0 * M * b)]
Substantial Growth Rate = [$400 * 20%* 0.80] / [$650 - $70 - ($400 * 20% * 0.80)]
Substantial Growth Rate = $64 / $516
Substantial Growth Rate = 0.1240 = 12.40%

So, growth in sales is 12.40%

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