Instructions: Use the pro forma financial statements to answer the questions below. Change the assumptions in the assumptions box as needed to answer the questions. In addition to the assumptions listed on the spreadsheet, also assume that all asset accounts will grow at the same rate as sales, and that no new equity will be issued in 2014.

Questions: Answer all parts in detail

a. Enter a formula for external funding required in the first green box. How much external financing does Ottawa need in 2014?

b. Given your answer from (a), do you expect the sustainable growth rate to be greater than, less than, or equal to the sales growth rate for 2014? Enter a formula for the sustainable growth rate in the second green box. What is Ottawas sustainable growth rate?

c. At what rate does the actual sales growth rate equal the sustainable growth rate? How much external financing is required at this growth rate? (This can be determined by trial and error.)

d. Return the sales growth rate to 15%. Suppose Ottawa wants to solve the financing shortfall by increasing profit margin. How low would the ratio of COGS/Sales have to go in order to make up the shortfall? With COGS/Sales at this lower level, what is the sustainable growth rate? (Hint: The Goal Seek tool can help you find this quickly. Consult Excel Help if you are unfamiliar with the Goal Seek tool.)

e. Return COGS/Sales to 75%. Now suppose Ottawa wants to solve the shortfall by increasing the retention ratio. How low would the dividend payout ratio have to be in order to eliminate the financing shortfall?

f. Return the dividend payout ratio to 40%. Now suppose Ottawa wants to make up any financing shortfall with increased debt. How high would the debt/equity ratio have to be to make up the difference?

g. Given the above options, and any other options that you can find, make a recommendation for a reasonable and practical solution to Ottawas financing shortfall. Your solution can involve changing multiple variables.

1 Chapter 4 Problem 12 Ottawa Corporation Financial Statements, 2013 and Projected 2014 (S millions) 3 4 INCOME STATEMENT BALANCE SHEET Projected Actual 2013 Actual 2013 Projected 2014 2014 8 Sales 9 COGS 10 Operating expense 11 EBIT 12 Interest expense 13 EBT 14 Tax 15 Net income $ 3,500 $ 4,025 3,019 403 604 80 524 183 195 $ 341 Cash Accounts receivable Inventory 150$ 2,775 360 365 68 297 102 540 1,050 1,740 1,578 3,318 173 621 1,208 2,001 1,815 3,816 Total current assets Property, plant, & equipment Total assets Total debt Shareholders' equity 1,208 2,416 $3,318 S3,625 1,106 2,212 Assumptions for 2014 Total liabilities & equity 18 Sales growth rate 19 COGS/sales 20 Oper. Exp./sales 21 Dividend payout ratio 22 Tax rate 23 Interest rate on debt 24 Total debt/equity 25 26 27 28 29 15.0% 75.0% 10.0% 40.0% 35.0% 7.2% 50.0% External funding required Sustainable growth rate