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Bannister Legal Services generated $2 million in sales during 2010, and its year-end total assets were $1.5 million. Also, at year-end 2010, current liabilities were $500k, consisting of $200k in notes payable, $200k in accounts payable and $100k in accruals. Looking ahead at 2011, the company estimates that its assets must increase at the same rate as sales, its spontaneous liabilities will increase at the same rate as sales, its profit margin will be 5% and its payout ratio will be 60%. How large a sales increase can the company achieve without having to raise funds externally; that is, what is its self-supporting growth rate?
Question B
Refer to Problem 12-1. What would be the additional funds needed if the company’s year-end 2010 assets had been $4 million? Assume that all other numbers, including sales are the same as problem 12-1 and that the company is operating at full capacity. Why is this AFN different from the one you found in Problem 12-1? Is the company’s “capital intensity” ratio the same or different?
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