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    Advanced Entrepreneurial Finance Exercise

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    sidi abdellahi
    The document provides financial information for ABC Company and calculates its sustainable growth rate (SGR) for fiscal year 2022 as 27.27%. It then considers ABC Company's plan to expand sales to $1.2 million by 2025. To achieve this, ABC would require $2.2 million in additional equity. Alternatively, taking on debt is not required. The new debt-equity ratio would be 10.1% with a lower SGR of 3.03%, showing that debt financing reduces sustainable growth.

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    Advanced Entrepreneurial Finance Exercise

    Uploaded by

    sidi abdellahi
    20 views3 pages
    The document provides financial information for ABC Company and calculates its sustainable growth rate (SGR) for fiscal year 2022 as 27.27%. It then considers ABC Company's plan to expand sales to $1.2 million by 2025. To achieve this, ABC would require $2.2 million in additional equity. Alternatively, taking on debt is not required. The new debt-equity ratio would be 10.1% with a lower SGR of 3.03%, showing that debt financing reduces sustainable growth.

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    exercise in finance

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    The document provides financial information for ABC Company and calculates its sustainable growth rate (SGR) for fiscal year 2022 as 27.27%. It then considers ABC Company's plan to expand sales to $1.2 million by 2025. To achieve this, ABC would require $2.2 million in additional equity. Alternatively, taking on debt is not required. The new debt-equity ratio would be 10.1% with a lower SGR of 3.03%, showing that debt financing reduces sustainable growth.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    20 views3 pages

    Advanced Entrepreneurial Finance Exercise

    Uploaded by

    sidi abdellahi
    The document provides financial information for ABC Company and calculates its sustainable growth rate (SGR) for fiscal year 2022 as 27.27%. It then considers ABC Company's plan to expand sales to $1.2 million by 2025. To achieve this, ABC would require $2.2 million in additional equity. Alternatively, taking on debt is not required. The new debt-equity ratio would be 10.1% with a lower SGR of 3.03%, showing that debt financing reduces sustainable growth.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    of 3

    Exercise: (Sustainable Growth Rate)

    Suppose you have the following financial information from ABC Company Ltd.

    Summary of Financial Information (FY 2022)


    Net Sales $750000
    Gross Profit $200000
    Net Profit $125000
    Tax Rate 40%
    Dividend Paid $50000
    Equity eop $300000
    Equity bop $275000
    Total Asset $550000
    Long-term debt $150000
    Short-term debt $100000

    1) Calculate the sustainable growth rate for FY 2022 and comment on it:

    The formula to calculate SGR is= (Net Profit / Equity bop) * (1 - Dividend Payout Ratio)

    We have Net profit and Equity bop but we still need to calculate Dividend Payout Ratio:

    Dividend Payout Ratio = Dividend Paid / Net Profit

    Dividend Payout Ratio = $50,000 / $125,000 = 0.4 = 40%

    Sustainable Growth Rate:

    SGR = (Net Profit / Equity bop) * (1 - Dividend Payout Ratio)

    SGR = ($125,000 / $275,000) * (1 - 0.4)

    SGR = 0.4545 * 0.6 = 0.2727 or 27.27%

    The sustainable growth rate for FY 2022 is 27.27%.

    Comment:
    In the case of company ABC, the calculated SGR of 27.27% indicates that the company can
    sustainably grow its operations by 27.27% while retaining the same financial structure by
    using its internal resources.

    (1) Suppose ABC Company wants to expand sales to $1200000 by the end of FY 2025.
    How much additional equity does the Company require to obtain the predicted sales?
    Alternatively, how much debt capital the Company should look for if the interest on
    the debt is 10%? What would be the new debt-equity ratio? What would be a new
    sustainable growth rate if the Company obtains a loan to get the desired sales? Is this
    growth rate higher than the sustainable growth rate for FY 2025? Why? Why not?

    Note : Interest on Debt 25000

    - To calculate the additional equity that ABC company requires to obtain the predicted
    sales of $1,200,000 by the end of FY 2025, we use the following formula:

    Additional Equity Required = (Target Sales - Net Sales) / (SGR * Net Sales)

    Additional Equity Required = ($1,200,000 - $750,000) / (0.2727 * $750,000)

    Additional Equity Required = $450,000 / $204,225

    Additional Equity Required = 2.20 or $2.20

    So, ABC Company would require $2.20 million in additional equity to obtain the predicted
    sales of $1,200,000 by the end of FY 2025.

    - Alternatively, if ABC Company decides to look for debt capital instead of additional
    equity, we calculate the amount of debt required using the following formula:

    Debt Required = Additional Financing - (Additional Equity Required + Interest on Debt)

    Debt Required = $1,200,000 - ($2.20 million + $25,000)

    Debt Required = $1,200,000 - $2,225,000

    Debt Required = -$1,025,000

    Since the number is negative that means that the company doesn’t need to seek additional
    debt capital to obtain the predicted sales.

    - To calculate the new debt-equity ratio we need to first calculate the new equity value
    after obtaining the loan:

    New Equity = Equity bop + Additional Equity Required

    New Equity = $275,000 + $2.20 million


    New Equity = $2,475,000

    Secondly, we need to calculate the new total assets after obtaining the loan:

    New Total Assets = Total Assets + Additional Financing

    New Total Assets = $550,000 + $1,200,000

    New Total Assets = $1,750,000

    Now, we can calculate the new debt value:

    Debt = Long-term debt + Short-term debt

    Debt = $150,000 + $100,000

    Debt = $250,000

    The new debt-equity ratio can be calculated as:

    Debt-Equity Ratio = Debt / New Equity

    Debt-Equity Ratio = $250,000 / $2,475,000

    Debt-Equity Ratio = 0.101 or 10.1%

    - To calculate the new sustainable growth rate if the company obtains a loan to get the
    desired sales:

    New SGR = (Net Profit / New Equity) * (1 - Dividend Payout Ratio)

    New SGR = ($125,000 / $2,475,000) * (1 - 0.4)

    New SGR = 0.0505 * 0.6

    New SGR = 0.0303 or 3.03%

    The new sustainable growth rate, if the company obtains a loan to reach the desired sales,
    would be approximately 3.03%.

    This new growth rate is considerably lower than the first sustainable growth rate of 27.27%
    calculated for FY 2025. If the company takes debt to finance growth it can decrease the
    company's equity and increase its financial obligations, which leads to a lower sustainable
    growth rate.

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