Chapter 4 Problem 13: Ottawa Corp. Use the pro forma financial statements to ans
ID: 2818408 • Letter: C
Question
Chapter 4 Problem 13: Ottawa Corp.
Use the pro forma financial statements to answer the questions below. Change the assumptions in the assumptions box as needed to answer the questions. In addition to the assumptions listed on the spreadsheet, also assume that all asset accounts will grow at the same rate as sales, and that no new equity will be issued in 2018.
Enter a formula for external funding required in the first green box. How much external financing does Ottawa need in 2018?
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 2018? Enter a formula for the sustainable growth rate in the second green box. What is Ottawa’s sustainable growth rate?
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.)
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 cost of goods sold/sales have to go in order to make up the shortfall? With cost of goods sold/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.)
Return cost of goods sold/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?
OTTAWA CORP.
INCOME STATEMENT ($ millions)
BALANCE SHEET ($ millions)
Actual
Projected
Actual
Projected
2017
2018
2017
2018
Sales
$3,500
$4,025
Cash
$150
$173
Cost of goods sold
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 2018
Total liabilities & equity
$3,318
$3,625
Sales growth rate
15.0%
Cost of goods sold/sales
75.0%
External funding required
Operating expense/sales
10.0%
Sustainable growth rate
Dividend payout ratio
40.0%
Tax rate
35.0%
Interest rate on debt
7.2%
Total debt/equity
50.0%
OTTAWA CORP.
INCOME STATEMENT ($ millions)
BALANCE SHEET ($ millions)
Actual
Projected
Actual
Projected
2017
2018
2017
2018
Sales
$3,500
$4,025
Cash
$150
$173
Cost of goods sold
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 2018
Total liabilities & equity
$3,318
$3,625
Sales growth rate
15.0%
Cost of goods sold/sales
75.0%
External funding required
Operating expense/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%
Explanation / Answer
1…For the given 2018 projections External funding required 3816-2416-1106= 294 Sustainable growth rate(SGR)= Return on Equity*Retention Ratio ROE*RR (341/2416)*60% 8.47% SGR 8.47%Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.