Pierce Furnishing generated $2 million in sales during 2012, and its year-end to
ID: 2714164 • Letter: P
Question
Pierce Furnishing generated $2 million in sales during 2012, and its year-end total assets were $1.6 million. Also, at year-end 2012, 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 2013, the company estimate that its assets must increase by $0.80 for every %1.00 increases in sales. Plerce's profit margin is 7%, and its retention ratio is 60 %. How large of a sales increase can the company achieve without having to raise funds externally? Write out your answer completely. For example, 25 million should be entered as 25,000,000. Round your answer to the nearest cent.Explanation / Answer
IGR = (ROA * b)/1-(ROA * b), where ‘ROA’ is the return on Total Assets and ‘b’ is the retention ratio
Hence, IGR for the firm =
7% is the profit margin on sales; on assets it would be (2000000 * 7)/1600000 = 8.75%
and ‘b’ the retention ratio = 0.60
Therefore, IGR = (0.875 * .6)/1-(0.875*.6) =.0525/0.9475 = 0.055408
Hence, the company can have a growth in sales to the extent of 5.54%
Further calcultions are:
Sales in 2013 = 2,000,000 * 1.055408= 2,110,818 $
Profit = .07 * 2,110,800 = 147,756 $
Retention = .6 * 147756 = 88,654 $
Total Assets = 1,600,000 + .8 * 110818 = 1,688,654 $
The Balance Sheet would be as below, at the end of 2013:
Liabilities: Assets
Share Capital 1,188,654 Total Assets 1,688,654
Current liabilities 500,000
Total Liabilities 1,688,654