Question

Paladin Furnishings generated $4 million in sales during 2016, and its year-end total assets were $2.4 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 must increase by $0.60 for every $1.00 increase in sales. Paladin's profit margin is 3%, and its retention ratio is 55%. How large of a sales increase can the company achieve without having to raise funds externally

Answer 1

Answer:

$105,571.6

Explanation:

Calculation of how large of a sales increase can the company achieve without having to raise funds externally.

The first step is to calculate the self-supporting growth rate using this Formula:

Self-supporting growth rate =

M (1-POR) (S0)÷A0 – L0 – M (1-POR) (S0)

Where:

M = Net Income/Sales = 3%

POR = Payout ratio = 55%

S0 = Sales = $4,000,000

A0 = $2,400,000

L0 = Spontaneous liabilities = $200,000+$100,000 =$300,000

We are using only accounts payable and accruals for LO because they are been considered as spontaneous liabilities

Let plug in the formula

.03 (1 - .55) (4,000,000) ÷2,400,000-300,000 - .01(1-.55)(4,000,000)

=54,000÷2,100,000 – 54,000

=54,000÷2,046,000

=2.63929%

Therefore, the self-sustaining growth rate will be 2.63929%

Second step is to Calculate for how large a sales can increase

Using this formula

Sales amount * Self-sustaining growth rate

Let plug in the formula

$4,000,000×2.63929%

=$105,571.6

Therefore, the sales can increase by $105,571.6