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    Pierce Furnishings: Raising Funds

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    Pierce Furnishings generated $2.0 million in sales during 2005, and its year-end total assets were $1.5 million. Also at the year-end 2005, current liabilities were $500,000 consisting of $200,000 of notes payable, $200,000 of accounts payable and $100,000 of accruals.

    Looking ahead to 2006, the company estimates that its assets must increase by 75 cents for every $1 increase in sales. Pierce's profit margin is 5% and its payout ration is 60%. How large a sales increase can the company achieve without having to raise funds externally?

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    Solution Preview

    Sales in 2005= $2,000,000
    Increase in assets = 75 % of increase in sales
    Let the new sales for which no external funds is required= x
    Therefore net profit = 5 % of x ( as profit margin is 5%)
    Retained income = 40 % ...

    Solution Summary

    The solution explains how to calculate the sales growth possible without rasing external capital.