Financial Management: Sustainable Growth, Valuation, and Planning

This finance assignment provides solutions to several key questions related to financial planning and management. The solution covers topics such as financial planning methods, the impact of cash investment on fast-growing companies, the effect of dividend payout ratios, and the concept of WACC. It also includes a detailed explanation of the sustainable growth rate, its formula, and how companies can manage it through share repurchases or dividend payments. Furthermore, the assignment addresses the terminal value, explaining its significance in company valuation and how it's calculated when future cash flows are expected to grow or remain constant. The assignment covers various aspects of financial planning, valuation, and growth strategies for businesses.

Question 2:
Financial Planning method.
Question 3:
$20 million
Question 4:
Due to the required cash investment in current assets fast growing and profitable companies
can literally grow broke.
Question 5:
An increase in dividend payout ratio.
Question 6:
None of the above.
Question 7:
Is equivalent to the average current yield on all of a firms outstanding bonds.
Question 8:
Reject the project regardless of financing method
Question 9:
Accounts payable and accrual are tied directly to the sale.
Question 10:
The risk associated with the use of funds required by the project.

Question 11:
Dividend policy.
Question 12:
Question 13:
The WACC is the average of all the sources of finance for a company through which
the company finances its operations. The company can finance its operations either through
equity financing or through debt financing. The equity financing is considered to be a risky
option for the company, and hence requires a higher level of return for capital provided to the
company. The debt financing is less risky than equity financing as it creates a charge on the
assets of the company, also the interest which is paid on debt is tax deductible which provides
a tax shield on the profits of the company. Thus, with the rise marginal tax rate, the tax shield
which is received by the company increases which reduce the cost of capital for the company
or the WACC for the company.
The rise in tax rates has a positive effect on the WACC of the company due to
reducing cost of capital.
Question 15:
Part 1:

The sustainable growth rate is the highest or the maximum level of growth which a
company can achieve without the need for financing its activities with debt or equity. Thus,
the growth of the company is financed with the earnings which is retained by the company
and provided to the shareholders.
Part 2:
The sustainable growth rate is the rate, which the company can expect to sustain over
the life span of the company. If the actual growth rate of a company is greater than the
sustainable growth rate the company can face issues in future due to unchecked growth. Thus,
the sustainable growth rate is the rate at which the company can grow, and be sustainable for
all the stakeholders of the company. The formula for sustainable growth rate is the return on
equity of a company multiplied with the retention ratio. Thus, the return which needs to be
generated by the company for the equity shareholders can be earned with the funds which are
not distributed to the shareholders and sustainable growth rate is .calculated for a company.
Thus, when the sustainable growth exceeds the actual growth a company needs to
reduce the sustainable growth to the actual growth levels. The company would pay off the
earnings in the form of share repurchase to the shareholders, thus reducing the retention ratio
which would lower the sustainable growth rate to the actual growth rate of the company.
Part 3:
The other method when the sustainable growth rate of the company increases from the
actual growth rate, is to pay dividends. Thus this would lower the retention ratio of the
company and would lead to the reduction of the sustainable growth rate of the company.
This method can be the alternative to the share repurchase method which had been
taken earlier by the company.

Question 16:
The terminal value or the horizon value is the expected value of the company after a
period of time, at which the company can be sold to prospective buyers. Thus, this value is
taken into account when valuing a company as it provides an estimate of the value of the
shareholders in present value terms.
Thus, when the future cash flow is not assumed to grow at that point, the cash flow is
the discounted by the required rate of return. Thus, the present value of the cash flow is taken
as the terminal value. Also when the future value is expected to grow in the future, the cash
flow is discounted by the required return less the growth rate and is brought back to the
present value.