(a)What is the significance of the internal growth rate? The sustainablegrowthrate? (b)Assume that Angostura is currently operating at fullcapacity. -All costs/expenses/income and net working capital vary directly withsales/revenue. -Interest Expenses will remain unchanged. -The tax rate and the dividend pay-out ratiowill remainconstant.How much additional debt is required, if any, if no new equity is raised and sales/revenue are projected to increaseby10%?(20Marks) NOTE:-Tax Rate must be calculated (2 decimalplaces) -Pro forma statements are to be prepared (Round all figures to the nearestdollar) (c)Based on your answer from (b) above, how can Angostura obtain the external financing needed (if necessary), or, if the company has excess financing, how can they utilize this?
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
(a)What is the significance of the internal growth rate? The sustainablegrowthrate?
(b)Assume that Angostura is currently operating at fullcapacity.
-All costs/expenses/income and net working capital vary directly withsales/revenue.
-Interest Expenses will remain unchanged.
-The tax rate and the dividend pay-out ratiowill remainconstant.How much additional debt is required, if any, if no new equity is raised and sales/revenue are projected to increaseby10%?(20Marks)
NOTE:-Tax Rate must be calculated (2 decimalplaces)
-Pro forma statements are to be prepared (Round all figures to the nearestdollar)
(c)Based on your answer from (b) above, how can Angostura obtain the external financing needed (if necessary), or, if the company has excess financing, how can they utilize this?
Step by step
Solved in 3 steps