Paladin Furnishings generated $4 million in sales during 2016, and its year-end

Question

Paladin Furnishings generated $4 million in sales during 2016, and its year-end total assets were $3.2 million. Also, at year-end 2016, current liabilities were $500,000, consisting of $200,000 of notes payable, $200,000 of accounts payable, and $100,000 of accrued liabilities. Looking ahead to 2017, the company estimates that its assets increase by $0.80 for every $1.00 increase of sales. Paladin's profit margin is 3%, and its retention ratio is 50%. How large of a sales increase can the company achieve without having to raise funds externally?

Explanation / Answer

Internal growth rate indicates the growth that can be acheived without external funds

IRR = reinvested earnings/ Total assets

Profit of 2016 = 0.03* 4 = 0.12 Mn

Reinvested earnings = 0.12 *0.5 =0.06 Mn

IRR = 0.06 /3.2 = 1.88%

Next year sales = 4*1.0188 = 4.075 Mn

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