Petal Providers Corporation, described in Problem 5, is interested in estimating its sustainable sales growth rate. Last year, revenues were $1 million; net profit was $50,000; investment in assets was $750,000; payables and accruals were $100,000; and stockholders’ equity at the end of the year was $450,000 (i.e., beginning-of-year equity of $400,000 plus retained profits of $50,000). The venture did not pay out any dividends and does not expect to pay dividends for the foreseeable future.
A. Estimate the sustainable sales growth rate for Petal Providers based on the information provided in this problem.
B. How would your answer to Part A change if economic growth is average and Petal Providers’ net profit margin is 7 percent?