Question

Maggie's Muffins Bakery generated $4 million in sales during 2019, and its year-end total assets were $3 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 4%, and its payout ratio will be 40%. 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 calculations. Enter your answer for sales increase in dollars. For example, an answer of $2 million should be entered as 2,000,000.Round the monetary value to the nearest dollar and percentage value to one decimal place.Sales can increase by $___ , that is by ___%.

Answer 1

The self-supporting growth rate can be calculated using the formula [Increase in Sales] = [Profit Margin] x [Asset Turnover] x [Retention Ratio]. Given the provided information, the company can achieve a sales increase of $320,000 without having to raise funds externally.

Step-by-step explanation:

To determine the self-supporting growth rate, we need to calculate the maximum increase in sales that the company can achieve without having to raise funds externally. The formula for self-supporting growth rate is: [Increase in Sales] = [Profit Margin] x [Asset Turnover] x [Retention Ratio].

Given that the profit margin is 4% and the payout ratio is 40%, we can calculate the retention ratio as (1 - payout ratio) = (1 - 0.4) = 0.6. Now, we need to calculate the asset turnover, which is defined as sales divided by total assets.

Since the company estimates that its assets must increase at the same rate as sales, the asset turnover will remain constant. Therefore, the self-supporting growth rate is:

[Increase in Sales] = 0.04 x ([Sales] / [Total Assets]) x 0.6. We can plug in the given values: [Increase in Sales] = 0.04 x (4,000,000 / 3,000,000) x 0.6 = 320,000. The company can achieve a sales increase of $320,000 without having to raise funds externally.