Finance

Plug Variables

The pro forma statements from the above section indicate the firm will have excess fund if it will grow at all options as all growth rates are lower than the sustainable growth rate of 15.27%. The company can decrease its debts by the extra fund, thus will decrease the debt equity ratio. As the company decided to maintain a constant retention rate, it ends up with extra fund at the end of the year. In the current recession of economy, it will be risky to do any new investment. So, the company can pay off its debt which will give an encouraging signal to the shareholders. The table below lists the change is capital structure of the company.

The assumptions are made in preparing the pro forma income statement and balance sheet & projecting future share price.

Initially all assets, including fixed assets, accounts payable vary directly with sales.

Long term debt and common stock won’t vary with sales as management decision is to keep a constant long term debt and common stock.

As the company decided to maintain a constant retention rate, the company will pay dividend every year at the same rate.

Scenario Analysis

In this case study, the growth rate of 4% has been selected as the constant growth rate and the pro forma statement has been generated based on this growth rate. For scenario analysis, both optimistic and pessimistic scenarios are being considered.

We have taken the 4% growth rate in normal situation. If we want to be optimistic enough to predict that the economy will have a high growth and the company will also able to grow at 6% to 8%. On the other hand, the situation can also be worse enough to have a growth lower than the normal and the company may face a growth of 2% or even -0%. After analyzing the scenario of different situation we can say that the projected growth rate is appropriate for the company which will help the company to operate in the market even if the situation is worse. It gives a positive indication towards the...