BACC3701: The Sustainable Growth Rate (SGR) - The Stand-Alone Principle - Management Assignment Help

Assignment Task

Questions 2,3 and 4 (23 marks) of this assignment MUST be completed on an Excel Spreadsheet.

The following considerations will be applied when evaluating the submission:

1. The use of an Excel (for Windows) worksheet

2. The setting and presentation.

3. Acuracy of calculations and Analysis.

Question 1

a) In Finance, the focus is more on wealth maximization of the shareholder, though profit maximization is considered as a part of the wealth maximization objective. Discuss.

b) Define “the stand-alone principle” applying in evaluating projects and discuss the types of cashflows in project evolution.

Question 2

Active PLC is a leading investment company in Australia and you the below details relating to the capital structure of the company.

Current Capital Structure

a) Calculate the cost associated with each new source of finance. The firm has no retained earnings available.

b) Calculate the WACC given the existing weights

The financial controller does not believe the existing capital structure weights are appropriate to minimise the firm’s cost of capital in the medium term and believes they should be as follows

c) What impact do these new weights have on the WACC?

The firm is considering the following investment opportunity. (2020-2027) Data is as follows

e) Calculate the CAPM

f) Explain why this figure may differ from that calculated above (i.e. Cost of equity – Ordinary Shares)

Percentage of Sales Approach – Assume all spontaneous variables move as a percentage of sales.

a) Given an expected increase in sales of 12%, what is the amount of external funding required?

b) To maintain the current debt/equity ratio how much debt and how much equity is required?

c) Assuming the company is only operating at 95% capacity, how much new funding (if any) is required?

Question 4

a) Given an expected increase in sales of 13%, what is the amount of external funding required?

b) At this growth rate what is the addition to retained earnings?

c) Calculate the Sustainable Growth Rate (SGR)

d) At the SGR what external funding is required?

e) What would be the growth rate at which no external financing would be required?

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