Reference no: EM132857120

Question - ABC Inc. is a juice producer which has been growing steadily for the past 5 years. According to the expected market demand, the company is planning to grow its sales at 15% next year. Since the company is currently operating at full capacity, fixed assets will also grow proportional to sales, same as current assets and current liabilities. However, long-term debt and equity will not grow proportional to sales but rather management will decide upon their next year level based on an acceptable level of debt to equity ratio as well as ROE ratio. The company has a dividend pay-out ratio of 40%, which the management want to maintain in order to meet the shareholders' expectations. Below are the financial statements of ABC Inc. for the year ending Sept 2020.

1. Determine the value of the "External money needed" for next year.

2. What would be the impact on ROE & Debt Equity ratios if the company decides to cover the "external money needed" by raising debt?

3. What would be the impact on ROE & Debt Equity Ratio if the company decides to cover the "external money needed" by raising new equity?

4. Comment on your answers to questions (2) & (3), how would an increase in debt or equity impact the ROE and debt to equity ratios?

5. If the company has a strict target of not exceeding a Debt-Equity ratio of 65%, which option (raising debt or raising equity) would be the preferred option for the company based on your answers to questions (2) & (3)?

6. If we assume that the company decided not to raise any external fund and depend solely on its own internally generated funds, what would be the maximum growth rate that it can achieve?

7. What is the company's sustainable growth rate?

8. In addition to the planned 15% growth of the next year, the company is considering a future mega project of introducing a new entire production line that can increase its market share by 5%. The company is planning for this expansion to take place four years from today when the company's production team is better prepared for such a leap in production. The total investment cost of this project is $3M, and the company wants to finance it by 50% debt and 50% equity. How much does the company need to save every year, for the coming four years, to raise $1.5M, if its saving account earns an interest rate of 4%?

9. If the company cannot save more than $250,000 per year, how much would it be able to raise in 4 years time (given an interest rate on saving account of 4%).

10. How long would it take the company to cover the required $1.5M if it saves $250,000 a year?