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Please provide three examples and applicable rationale with respect to how a firm might obtain external funding.

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The term capital structure is used to represent the proportionate relationship between debt and shares. The various means of financing represent the financial structure of an enterprise. Thus the composition of debt and shares represents the capital structure of the firm. One should measure the long term solvency of the organization for assessing the payment capacity of the organization. I will also use the Debt equity ratio which is Debt/Equity. This measures the long term solvency of the organization. Lower debt equity ratio indicates lower financial risk.

Let us discuss about h the sources of funds.

Equity represents ownership in the organization. There are various ways of raising money through equity shares:

1) IPO
IPO is initial public offer where the money is raised from the general public first time.
2) Follow on offers
Here the money is raised through the public ...

Solution Summary

Response describes the way of external funding

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The Optimal Scam Company would like to see its sales grow at 20 percent for the foreseeable future.

The Optimal Scam Company would like to see its sales grow at 20 percent for the foreseeable future. Its financial statements for the current year are presented below.

Income Statement Balance Sheet
($ millions) ($ millions)
Sales 32.00 Current assets 16
Costs 28.97 Fixed assets 16
Gross profit 3.03 Total assets 32
Taxes 1.03
Net income 2.00 Current debt 10
Long-term debt 4
Dividends 1.40 Total debt 14
Retained earnings 0.60 Common stock 14
Ret. earnings 4
Total liabilities and equity 32

The current financial policy of the Optimal Scam Company includes
Dividend-payout ratio (d) 70%
Debt-to-equity ratio (L) 77.78%
Net profit margin (P) 6.25%
Assets-sales ratio (T) 1

a. Determine Optimal Scam's need for external funds next year.
b. Construct a pro forma balance sheet for Optimal Scam.
c. Calculate the sustainable growth rate for the Optimal Scam Company.
d. How can Optimal Scam change its financial policy to achieve its growth objective?

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