Maurice Tutor

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Category > Management Posted 08 Jul 2017 My Price 12.00

formula for external funding

a. Enter a formula for external funding required in the first green box. How much external financing does Ottawa need in 2014? b. Given your answer from (a), do you expect the sustainable growth rate to be greater than, less than, or equal to the sales growth rate for 2014? Enter a formula for the sustainable growth rate in the second green box. What is OttawaAc€?cs sustainable growth rate? c. At what rate does the actual sales growth rate equal the sustainable growth rate? How much external financing is required at this growth rate? (This can be determined by trial and error.) d. Return the sales growth rate to 15%. Suppose Ottawa wants to solve the financing shortfall by increasing profit margin. How low would the ratio of COGS/Sales have to go in order to make up the shortfall? With COGS/Sales at this lower level, what is the sustainable growth rate? (Hint: The Goal Seek tool can help you find this quickly. Consult Excel Help if you are unfamiliar with the Goal Seek tool.) e. Return COGS/Sales to 75%. Now suppose Ottawa wants to solve the shortfall by increasing the retention ratio. How low would the dividend payout ratio have to be in order to eliminate the financing shortfall? f. Return the dividend payout ratio to 40%. Now suppose Ottawa wants to make up any financing shortfall with increased debt. How high would the debt/equity ratio have to be to make up the difference? g. Given the above options, and any other options that you can find, make a recommendation for a reasonable and practical solution to OttawaAc€?cs financing shortfall. Your solution can involve changing multiple variables.

 

Ottawa Corporation
Financial Statements, 2013 and Projected 2014 ($ millions)
             
INCOME STATEMENT   BALANCE SHEET
  Actual Projected     Actual Projected
  2013 2014     2013 2014
Sales $         3,500 $     4,025   Cash $            150 $            173
COGS             2,775         3,019   Accounts receivable                540                621
Operating expense                360            403   Inventory             1,050             1,208
EBIT                365            604      Total current assets             1,740             2,001
Interest expense                  68              80   Property, plant, & equipment             1,578             1,815
EBT                297            524      Total assets             3,318             3,816
Tax                102            183        
Net income $            195 $        341   Total debt             1,106             1,208
        Shareholders' equity             2,212             2,416
Assumptions for 2014      Total liabilities & equity $         3,318 $         3,625
Sales growth rate   15.0%        
COGS/sales   75.0%   External funding required    
Oper. Exp./sales   10.0%   Sustainable growth rate    
Dividend payout ratio 40.0%        
Tax rate   35.0%        
Interest rate on debt   7.2%        
Total debt/equity   50.0%    

Answers

Maurice Tutor
(5)
Status NEW Posted 08 Jul 2017 08:07 AM My Price 12.00

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