As an alternative proposal means of increasing shareholder value, you have also been asked to evaluate Monsanto’s intent to expand its operations to pesticide production, which is expected to yield a sales increase of $3,950,000. There is no excess capacity, and the increase in fixed asset needs would be equal to 70% of this increase in sales, while cost of sales would run 20% of sales, using a percentage of sales approach. Assume that Monsanto issues dividends at a rate of 1.98% of net sales, and thus the firm’s retention ratio is 98.2%. Current sales are projected to be $15,239,000. Assume that the proposed project has a risk and weighted average cost of capital similar to that of Monsanto, and a firm beta similar to that of Monsanto.
1. The extent to which Monsanto will have to take on additional debt, given that it wishes to retain its current dividend ratio and does not wish to sell additional equities.
2. Calculate the firm’s sustainable growth rate and internal growth rate and use these measures to analyze a decision to accept this alternative proposal. Use these measures and concepts covered in assigned readings including EFN, DuPont Identity and leverage, to explain the importance of these measures to shareholder interests.
