The extent to which Monsanto will have to take on additional debt, given that it wishes to retain its current dividend ratio and does not wish to sell additional equities.
Monsanto would like to build investor esteem and this would have to include a decrease in various offers given by the firm. The aim of the association is that it extends its operations of pesticide will yield a business increment of approximately $3,950,000. The increase in the needs of the fixed asset is going to be equal to 70% and there is no excess capacity. The cost of sales is going to be 20% of the offers. The profit rate of the company is 1.98% of its net deals and the maintenance proportion of the company is thus 98.2%. From the information provided, one finds that the settled resources ought to be expanded by 70% of $3,950,000 = $2,765,000.
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The firm has two strategies to meet its financial needs, either by value or obligation ( Markova, 2009 ). The firm does not wish to offer value and will thus try to offer to subsidize the venture in the form of obligation. The statement of income will then have to be adjusted to reflect the resultant changes that have been caused by the increased sales.
The company’s Gross profit is calculated as: Total sales – cost of sales (20% of sales) Gross profit margin = $15,239,000 - $3,047,800 = $12,191,200.
The gross profit margin is thus expected that it will increase to $12,191,200.
The extent which Monsanto will have to take on additional debt is calculated by finding the External Financial Need (EFN) through the following formula:
Where = current sales ($15,239,000) = Forecasted sales = (1+g) = $15,239,000 (1+25.92%) = $ 19,189,000
g = forecasted growth rate in sales which is ( 3,950,000/ 15,239,000) = 25.92%. = liabilities = 14,930,000
PM = profit margin = 21.3%
b = retention ration = 98.2% = required increase in assets = $2,765,000.
EFN = $5,118,592.54
The extent to which Monsanto will have to take additional debt is thus $5,118,592.54
Calculate the firm’s sustainable growth rate and internal growth rate and use these measures to analyze a decision to accept this alternative proposal. Use these measures and concepts covered in assigned readings including EFN, DuPont Identity and leverage, Modules One through Six, to explain the importance of these measures to shareholder interests.
Sustainable growth rate is the highest rate of growth a company can carry out without having to raise its financial leverage or looking for any external financing. The sustainable growth rate of a company is an important measure to shareholders because it can measure how big and how fast a firm can be able to grow without the need to find external funding (Jordan, 2014).
Sustainable growth rate = Return on equity * (1 – dividend payout ratio)
Sustainable growth rate = 14.93% * (1-1.98%)
Sustainable growth rate = 14.63%
Internal growth rate is the maximum level of growth which can be attained by a company without acquiring any external funding. This value is important to shareholders because it determines the rate which a business can grow as it continually funds the company. The measure gives the ability to increase profits and sales without having more debt or equity (Brealey et al., 2012).
Where; ROA = Return on assets
b = retention ratio
References
Brealey, R. A., Myers, S. C., & Marcus, A. J. (2012). Fundamentals of corporate finance . McGraw-Hill/Irwin,
Jordan, B. (2014). Fundamentals of investments . McGraw-Hill Higher Education.
Markova, S., (2009). Financing options for entrepreneurial ventures. Economic Interferences , 11 (26), 597-604.
