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The major assumption inherent in the proportional growth (percentage of sales) method is that all...

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Finance

The major assumption inherent in the proportional growth (percentage of sales) method is that all assets increase proportionally with sales. In effect, this means that the regression of each asset account against sales would result in a straight line that passes through the origin. To check on this assumption, used both in the formula and in Table 3, you could run a regression of each asset against sales, using data from Table 1. As a quick check, run a regression of total assets on sales to test the assumption. (Hint: You can use a financial calculator or the Lotus 1-2-3 model, or you can get an approximation from a graph.) Does it appear that the proportionality assumption holds true? Explain. Repeat the part a. Regression analyses assuming the following data: YEAR SALES TOTAL ASSETS 1988 $30.00 $29.40 1989 $42.00 $31.88 1990 $54.59 $37.73 1991 $68.25 $43.08 1992 $88.73 $44.34 Under these conditions, does it appear that the proportionality assumption hold true? Explain. C. Which of the situations above is likely to hold for most firms? What implications does your answer here have for the percentage of sales method?

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