Question

Maggie’s Muffins Bakery generated $5 million in sales during 2019, and its year-end total assets were $2.5 million. Also, at year-end 2019, current liabilities were $1 million, consisting of $300,000 of notes payable, $500,000 of accounts payable, and $200,000 of accruals. Looking ahead to 2020, 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 7%, and its payout ratio will be 80%. How large a sales increase can the company achieve without having to raise funds externally—that is, what is its self-supporting growth rate?

Answer 1

Answer:

4.04%

Explanation:

Given that,

Current sales = $5,000,000

Current total assets = $2,500,000

Profit margin = 7%

Payout ratio = 80%

Accounts payable = $500,000

Notes payable = $300,000

Accruals = $200,000

Current Spontaneous Liabilities:

= Accounts Payable + Accruals

= $500,000 + $200,000

= $700,000

Retention Ratio:

= 1 - Payout Ratio

= 1 - 0.8

= 0.2

Self-supporting Growth Rate:

= [Profit margin × Retention Ratio × Current Sales] ÷ [Current Total Assets - Current Spontaneous Liabilities - (Profit margin × Retention Ratio × Current Sales)]

= [0.07 × 0.2 × $5,000,000] ÷ [$2,500,000 - $700,000 - (0.07 × 0.2 × $5,000,000)]

= $70,000 ÷ $1,730,000

= 0.0404 or 4.04%