The analysis of the project involves an analysis of Monsanto a seed company in the United States. Bayer initially considered the bid for Monsanto and the analysis involves determining whether Monsanto should agree the purchase. However, Monsanto can seek another option that could result in the company gaining profits through the increased sales and increased shareholder value. The company’s purpose was to enlarge the pesticide procedures so as to increase the amount of sales to a value of $3950000. With the growth in sales, the fixed assets were set to amount to of the sales and the cost of sales amount to. Assumptions provided were that Monsanto issued dividends of the net sales. This would mean that the company’s retention ratio was. The projection of the current sales is expected to be 15239000 dollars. The aim of the analysis is to assess Monsanto’s alternative opportunity where it strives to expand its operations by calculating the internal growth rate, the sustainable growth rate, and the external financing needed.
Extent of Taking Additional Debt
The information provided can be used to make calculations in the fixed assets after the increase in 70 percent.
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Fixed Assets = ($3,950,000) *(0.70) = $2,765,000.
A company that seeks to expand and further its business can find two alternative financial sources. One of the sources would be from equity financing and the other source from debt financing (Coleman et al., 2016). Financing from debt involves the borrowing of money that should be paid on a later date plus interest. Equity financing involves raising of money through the use of selling interests within the company (Holderness, 2018). A company may choose not to sell more equities. In such a case, the other source of financing will be through the use of debt.
Adjustments to Reflect Increase in Sales
Adjustments that were made to the income statement that mirror the changes made after the increased sales were calculated as follows.
Total Sales Amount:
Total cost of sales: 20 % of total sales = =
Total gross profit was calculated as the total sales minus cost of sales (Robinson, 2015).
Total gross profit =.
It is expected that the increase in the gross profit margin was.
Calculation of External Financing Needed (EFN)
External Financing Needed is a process that identifies external funds that have to be raised that can back the increased level of sales. The relationship between the profitability of a firm and the need for external financing was found to be negative (Karakaya, 2017). The EFN is usually calculated through the following formula:
Where:
A 0 : Amount of assets at time t = 0 that varies directly with the sales
S 0 : Amount of current Sales: S 0 =
S 1 : Amount of sales forecasted:
g: Percentage of Sales growth forecasted
L 0: Amount of liabilities at the time 0 that varies directly with the sales = $.
PM: Ratio of Profit Margin given as Net Income divided by Sales
b: Ratio of Retention given as addition to Retained Earnings divided by Net Income = 1.98 %.
The calculation was carried out as follows:
EFN=$2,765,000- ($15,696,170-$15,239,000)-(0.55) ($15,696,170) (1.98%)
EFN =
The amount of additional debt required for Monsanto was calculated as .
Calculation of Sustainable Growth Rate
The sustainable growth rate involves the highest growth rate which can be sustained by a firm without seeking any outside financing or using financial leverage sources (“Sustainable Growth Rate”, 2019). The calculation of the SGR was as followed:
Sustainable growth rate =
Calculation of Internal Growth Rate
The internal growth rate (IGR) is used to provide the maximum growth level a company can attain without the use of outside financial sources. The measurement is important to shareholders of a company because it indicates a firm’s ability to raise profits and sales without necessarily seeking more debt or equity (“Internal Growth Rate (IGR) Definition”, 2019). The formula for the internal growth rate is given as:
Where:
ROA: Return on Assets
B: Retention Ratio
The calculation was as follows:
Challenges in the Milestone
The challenges experienced in the milestone involved the calculation of the IGR and the EFN. The ENF formula was quite long and required steps for calculation. It also required long computations for one to arrive at the final answer. The formula required to be used through the IGR calculation was also complicated, it was not straightforward but required extra effort and work. The difficulty in the calculations could mean that there were errors in the final results. However, care was taken throughout the calculations to ensure that there were minimal errors.
Conclusion
Monsanto has an intention to increase the shareholder value and would seek to explore an alternative opportunity to increase the sales of the company. The projected increase in sales was amounted to $15,239,000. The analysis involved assessment of the internal growth rate, the sustainable growth rate, and the external financing needed. The external financing needed to be financed through additional debt was calculated as $2223288.72. The sustainable growth rate was calculated as 14.63 % while the internal growth rate was calculated as 11.57 %.
Reference
Coleman, S., Cotei, C., & Farhat, J. (2016). The debt-equity financing decisions of US startup firms. Journal of Economics and Finance , 40 (1), 105-126.
Holderness, C. G. (2018). Equity issuances and agency costs: The telling story of shareholder approval around the world. Journal of Financial Economics , 129 (3), 415-439.
Internal Growth Rate (IGR) Definition. (2019). Internal Growth Rate (IGR) Definition. Retrieved from https://www.investopedia.com/terms/i/internalgrowthrate.asp
Karakaya, A., Kurtaran, A. T., & Kurtaran, A. (2017). Firm Value and External Financing Needs. International Journal of Economics and Finance , 9 (6), 69-81.
Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial statement analysis . John Wiley & Sons.
Sustainable Growth Rate – SGR. (2019). Sustainable Growth Rate – SGR. Retrieved from https://www.investopedia.com/terms/s/sustainablegrowthrate.asp
