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1. Sustainable Growth Rate (Part A through D)2. Weighted Average Cost of Capital (WACC)3. External Financing Needed (EFN) – AutoCalc – percentage of sales method4. External Financing Needed (EFN) – Direct Method (Part A and B)5. External Financing Needed (EFN) – Excess Capacity (90%)Test 2o Submit on Canvas by 10:30 am, Tuesday, November 23, 2021.o There is a penalty of 1point for every 1 minute that the submission is late.o You may not work with (get help from/give help to) anyone else on this test.Use ONE Excel workbook, but a separate sheet for each problem. You may work all parts of the same problem in one sheet (e.g. parts A through D ofQuestion 1), and so on. So, as there are 5 questions on the test, your Excel workbook should have 5 sheets.Show work clearly, else NO partial credit will be given.Question 1 (25 Points)A. Use the information below from Paxton Industries annual financial statements to calculate the actual and sustainable growth rate for each year from 2016– 2020. (15 points)B. Describe the company’s growth challenge, if any, over this period. (5 points)C. Comment on the observed change in the company’s payout policy over the period in question. Does it make sense in the context of the company’s growthchallenge? Explain. (2.5 points)D. What are some recommendations you might provide management that will help to meet this growth challenge? (2.5 points)Paxton Industries ($ in thousands)2014 2015 2016 2017 2018 2019 2020Equity – 377.49 464.35 507.78 471.87 603.06 680.72Total assets – 520.00 706.78 724.04 759.90 1071.07 1423.35Sales 597.30 585.03 861.95 950.41 1139.48 1360.58 1721.78Net income – 51.92 31.57 46.18 53.81 30.91 38.26Dividends – 0.00 0.00 1.20 1.88 2.56 3.04Question 2 (20 points)Dexter Corp has 9.4% coupon bonds outstanding that have a remaining maturity of 10 years. They pay interest semiannually, and are currently selling for$1075 for every $1000 of face value. The firm also has perpetual preferred stock outstanding. Each of the preferred shares has a par value of $100, and iscurrently trading for $80. Each carries a fixed annual dividend of $10. Dexter common stock is trading at $38.40 per share. Each share of common isexpected to pay a dividend of $4.15 for the coming year (i.e. one year from today). Analysts expect Dexter earnings and per-share dividends to grow at aconstant rate of 3.75% for the foreseeable future. Dexter stock is estimated to have a beta of 1.55. The estimated market risk premium is 7%, and the proxyfor the risk-free rate is the 3.25% yield on US Treasury securities. Dexter faces a marginal tax rate of 28%. Its management has a policy of raising funds in thefollowing market-value based proportions: Common Stock 25%; Debt 60%; and Preferred Stock 15%. Estimate Dexter Corp’s weighted average cost of capital(WACC).Use the financials for Garland Company below to answer Questions 3—5Garland CompanyBalance Sheet, Year Ended Dec 31, 2020Assets:Cash and marketable securities $ 500,000Accounts receivable 800,000Inventories 1,350,000Prepaid expenses 50,000Total current assets $ 2,700,000Gross Fixed Assets 5,000,000Accumulated Depreciation 2,000,000Net fixed assets $ 3,000,000Total assets $ 5,700,000Liabilities:Accounts payable $ 475,000Notes payable 900,000Total current liabilities $ 1,375,000 Long-term debt 1,200,000Owner’s equity 3,125,000Total liabilities and owner’s equity $ 5,700,000Garland CompanyIncome Statement, 2020Net sales $ 8,000,000Cost of Goods Sold 3,500,000Selling and administrative expense 2,000,000Depreciation expense 250,000Interest expense 150,000Earnings before taxes $ 2,100,000Income taxes 700,000Net income $ 1,400,000Question 3 (25 points)On account of its very recent entry into a lucrative market, Garland Company (whose financials are given above) projects an 18% increase in sales for nextyear (2020). NOTE: All numbers in the financials are in thousands of dollars. The company paid out $1.26 billion in dividends in 2020, and its payout ratio isconstant. Current assets and net fixed assets, and all operating expenses, vary directly with sales. Accounts payables will also maintain their existingrelationship to sales; the other liabilities, however, are not spontaneous. Management has decided that any required additional funding will be raised throughlong-term debt, on which it will pay an interest rate of 8.5%. Any short-term debt will be rolled over at the same interest rate as existed at the end of 2020.Long-term debt will increase by the full amount of any estimated EFN (i.e., no principal pay-down on existing debt is anticipated for next year, 2021). NOTE:This means that none of the existing debt will be paid down in 2021, and will be charged the same interest rate as it was charged in 2020. The tax rate for2020 will apply for 2021 as well. NOTE: You need to figure the tax rate yourself, based on the financials provided.Estimate the external financing needed (EFN) for 2021, based on the projected growth in sales, using the percentage of sales method. Make sure to set up an“assumptions box”, and automate the iterations (like we did in class) needed to estimate EFN.Question 4Refer to the information provided for Garland in Question 3.A. Use the “direct estimation of EFN” formula to estimate the external financing needed to support the projected growth in 2021. Do NOT use the pro-formafinancials to estimate the EFN. Show work clearly, please. (10 points)B. The EFN “direct” formula has 3 parts. Explain what each part estimates (here, I am looking for the “concept” behind each part, not the number). ALSO, whatare the assumptions implicit in your calculation of Garland’s EFN using the direct formula? Kindly be brief. (5 points)Question 5Suppose Garland Company (whose financials were provided above and used in Questions 3 & 4) is actually operating at 90% capacity. Adjust your EFNestimate from Part A of the previous question (Question 4, Part A) with this information in mind. What is the new estimate of Garland’s EFN? Show all workclearly. (15 points)
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