Question

Maggie's Muffins Bakery generated $5 million in sales during 2019, and its year-end Self-Supporting total assets were $2.5 million. Also, at year-end 2019 , current liabilities were $1 million, Growth Rate 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 operating 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

The self-supporting growth rate can be calculated using the given information and formulas. In this case, the self-supporting growth rate for Maggie's Muffins Bakery is 1.4%.

Step-by-step explanation:

To calculate the self-supporting growth rate of Maggie's Muffins Bakery, we need to consider the increase in operating assets, spontaneous liabilities, profit margin, and payout ratio.

First, we need to find the increase in operating assets. Since the company estimates that its operating assets must increase at the same rate as sales, the increase in operating assets will be the same as the increase in sales.

Next, we need to find the increase in spontaneous liabilities. Spontaneous liabilities are those that increase automatically with an increase in sales. In this case, the increase in spontaneous liabilities will also be the same as the increase in sales.

The profit margin is given as 7%. Profit margin is the ratio of net income to sales. In this case, net income is 7% of sales.

The payout ratio is given as 80%. The payout ratio is the percentage of net income that is distributed as dividends. In this case, 80% of the net income will be distributed as dividends.

To calculate the self-supporting growth rate, we can use the following formula:

Self-Supporting Growth Rate = (Profit Margin) × (1 - Payout Ratio) × (1 + Increase in Spontaneous Liabilities/Operating Assets)

Plugging in the values, we get:

Self-Supporting Growth Rate = (0.07) × (1 - 0.8) × (1 + Increase in Sales/Increase in Sales)

Simplifying further, we get:

Self-Supporting Growth Rate = 0.014

Therefore, the company can achieve a self-supporting growth rate of 1.4% without having to raise funds externally.