Sales Growth
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Pierce Furnishings generated $2.0 million in sales during 2004, and its year-end total assets were $1.5 million. Also, at year-end 2004, current liabilities were $500,000, consisting of $200,000 of notes payable, $200,000 of account payable, and $100,000 of accruals. Looking ahead to 2005, the company estimates that its assets must increase by 74% for every $1 increase in sales. Pierce's profit margin is 5%, and its payout ratio is 60%. How large a sales increase can the company achieve without having to raise funds externally?
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Solution Summary
The solution explains the increase in sales that can be possible without raising external funds.
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Sales in 2004= $2,000,000
Increase in assets = 74 % of increase in sales
Let the new sales for which no external funds is required= x
Therefore profit = 5 % of x ( as profit margin is 5%)
Retained income = 40 % (=100%-60%)of profits as payout ratio is 60%
Therefore retained income = 40 % of 5 % of x= 2 % of x
Increase in assets required= 74 % of increase in sales= 74 % of (x- 2,000,000)
This is to be financed by retained income as no external funds are required
Thus 2 % of x= 74 % of ...
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