Answer:
The Sales will increase by $350,000 (2000,000 * 17.5%)
Explanation:
As we know that,
Self Supporting Growth Rate = Return on Equity * (1 - Payout Ratio) ...Eq1
Here
Payout ratio given is 50%
and
Return on Equity = 35% <u>(Step 1)</u>
By putting values in Eq1, we have:
Self Supporting Growth Rate = 35% * (1 - 50%)
Self Supporting Growth Rate = 17.5%
Which means that Sales will increase by $350,000 (2000,000 * 17.5%) which is 17.5%.
<u>Step 1: Find Return on Equity</u>
We know that:
Return on Equity = Net Income / Equity ..............Eq2
As we are not given value of Net Income we can not calculate the value of return on equity. But there is another way that we can calculate by simply multiplying and dividing by sales on Left hand side of the Eq2 equation.
Return on Equity = Net Income / Equity * Sales / Sales
By rearranging, we have:
Return on Equity = Net Income / Sales * Sales / Equity
Now here,
Net Income / Sales = Profit Margin
By putting this in the above equation, we have:
Return on Equity = Profit Margin * Sales / Equity
Here
Profit Margin is 7% given in the question.
Sales were $2,000,000
And
Equity is $400,000 <u>(Step 2)</u>
By putting values, we have:
Return on Equity = 7% * $2,000,000 / $400,000
Return on Equity = <u>35%</u>
<u>Step 2. Find Equity</u>
Equity = Assets - Liabilities
Here,
Assets are worth $1,400,000
Liabilities are standing at $1,000,000 which includes only current liabilities because company doesn't have any long term borrowings
By putting the values, we have:
Equity = $1,400,000 - $1,000,000 = <u>$400,000</u>
<u>Brother, don't forget to rate the answer.</u>
