Upon assuming the position of Head of Finance at Prosperity Finance Systems Inc, you've undertaken the task of acquainting yourself with the intricacies of the company. To facilitate this process, you've initiated requests for key financial documents such as the Balance Sheet for the Current Fiscal Year, the latest Income Statement, and additional pertinent records. These essential documents were gathered by the Finance team and summarized in the Excel file below:

Sales $$60,000,000$ Taxes: $40\%$

COGS $$40,000,000$

Other expenses $$7,500,000$ Shares Outstanding $2,000,000$

Depreciation $$3,000,000$ Market$-$to$-$Book Ratio $1\mathrm{.}18$

EBIT $$9,500,000$ Depreciation of New Assets $15\mathrm{.}00\%$

Interest $$3,000,000$ Dividend growth in the last $7$ years $7\mathrm{.}00\%$

Taxable income $$6,500,000$

Taxes $(40\%)$ $$2,600,000$

Net income $$3,900,000$

$$

Dividends $$1,250,000$

Add to RE $$2,650,000$

Balance Sheet

Assets Liabilities & Owners$$ Equity

Current Assets Current Liabilities

Cash $$750,000$ Accounts Payable $$1,500,000$

Accounts Receivable $$1,500,000$ Notes Payable $$3,000,000$

Inventory $$2,500,000$ Total CL $$4,500,000$

Total CA $$4,750,000$ Long Term Debt $$15,000,000$

Fixed Assets Owners$$ Equity

Net PP&E $$35,000,000$ Common Stock $$9,500,000$

Retained Earnings $$10,750,000$

Total Equity $$20,250,000$

Total Assets $$39,750,000$ Total L & OE $$39,750,000$

Additionally, you were informed that the current tax rate is $40\%$ and this is forecasted to be stable for the next year, the company has $2$M shares outstanding and a Market$-$to$-$Book Ratio of $1\mathrm{.}18.$ The Accounting Department informed you that depreciation of new assets will be $15\%$ and that the dividend growth in the past seven years was $7\%.$

Question $1$

What are the values of the IGR and SGR

What do these numbers mean?

You were informed by the Economists at the firm that they are anticipating a $10\%$ growth in sales and, because the firm is currently operating at full capacity, any additional growth would necessitate a $$8$ million investment in fixed assets. Ahead of your meeting with the new CEO, you've taken the initiative to assess the potential implications of this projected growth.

What would be the External Financing Needed $($EFN$)$ given the $10\%$ increase in sales mentioned above? Please assume that the dividend payout ratio remains constant, and that the costs of goods sold, current assets, and accounts payable all grow proportionally to sales.

What does this number mean?

Consider the scenario in which you raise any necessary capital through long$-$term debt, without interest payments in the upcoming year. What would be the resulting Debt$-$Equity Ratio under the $10\%$ sales growth assumption? Would it be larger or smaller than your current Debt$-$Equity Ratio? Is the D$/$E you determined in line with the figures derived for the Internal Growth Rate $($IGR$)$ or Sustainable Growth Rate $($SGR$)$ you calculated previously?