MBAC 6060 – Spring 2013
Growth/ Forecasting/Financing Case II
Part 2: Growth Models
The goal is to build a spreadsheet model to examine the effects of different growth rates and financing
policies on the financial performance of BURRITOJOINT.
1. Calculate the components of External Financing Needed (EFN) and the EFN for BURRITOJOINT in
2009. Assume A/P is the only spontaneous liability in cells C80 thru C83.
2. Next, in cells M7 through N51, create regular and common-size 2010 pro-forma income statements
and balance sheets for BURRITOJOINT that reference the growth rate entered into cell C79.
Assume:
 Every item in the income statement grows proportionally with sales. This is the same as
assuming no change in either sales or expense efficiency.

Assume no change in dividend policy. This means all NI will be retained.

All asset categories grow at the sales growth rate. This means the asset mix does not change.

Only A/P grows at the sales growth rate (just like the assets). All other liabilities do not change.
This is same as saying A/P is the only spontaneous liability.

Retained Earnings in the pro-forma balance sheet increases by the “Increased RE from New
Sales” calculated in cell C82.

Use “Common Stock, Net” in cell M47 as the plug value. The plug value is the account adjusted
in order to make the balance sheet “balance.” So enter a formula into “Common Stock, Net” such
that it equals Total Assets less Total Liabilities less Retained Earnings.

Enter a growth rate of 25% into cell C79. If your spread sheet works correctly, changing the
“Projected Sales Growth” in cell C79 will cause the EFN in cell C83 and the values in the proforma balance sheet to change.

Copy and paste the cells that calculate the short-term solvency ratios (Current, Quick and Cash
Ratios) in the same rows under the new pro-forma financial statements (column M).

Copy and paste the cells that calculate profit, leverage and efficiency (the DuPont Identity Cells
ROE, EM, ROA, AT and PM) to column M.
Note that ROA, PM and AT are not effected by sales growth. Why?
3. Use the model to examine the effects of different growth rates and financing policies on the financial
performance of BURRITOJOINT.
(a) As an exercise, first assume sales grows at exactly the Internal Growth Rate (which is 15.20%).
To avoid a rounding error, set cell C79 equal to cell C76, don’t just type in the number.
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Compare the EFN at the Internal Growth rate to the “Liabilities Automatically Created by New
Sales” in cell C81. Explain your findings.
What are the effects on the firm’s short term solvency if it grows at the internal growth rate?
(Does short-term solvency improve or deteriorate?) Why?
What are the effects on the firm’s profitability, leverage and efficiency if it grows at the internal
growth rate? (Do these measures improve, stay the same, or deteriorate?) Why?
(b) Now assume sales will grow at 25% (enter 25% into cell C79).
Record the results for the liquidity, profitability and efficiency ratios from the projection in Table
2 on the “Tables” tab.
4. Now assume BURRITOJOINT is considering a change in its financing policy. It is considering using
accumulated cash (from past and current retained earnings) to pay for new assets instead of selling
new equity. This means you must adjust the model to account for the change in the financing policy.
There are a number of ways to adjust your model. Here’s one that will preserve the original model so
that you won’t lose those results:
Right-click the sheet tab at the bottom of the spreadsheet and select “Move or Copy”
Check the “Create a Copy” box and click OK
Right-click the new tab and rename it “Cash Financing”
(a) Adjust your pro form balance sheet to reflect the growth level and new financing policy. So now
“Cash and Cash Equivalents” is the plug value.
 All assets (except cash) will grow at the sales growth rate, so the formulas do not change
 A/P still grows at the sales growth rate so M37 = C37*(1 + C$79)
 No other liabilities change values.
 Retained Earnings in the pro form balance sheet still increases by the “Increased RE from
New Sales” calculated in cell C82 so M48 = C48 + C82.
 The new financing policy means new equity is not issued so M47 = C47.
 Set “Cash and Cash Equivalents” equal to “Total Liabilities and Equity” less all the non-cash
assets. This is the plug value.
So cell M24 = M51 – M33 – M27 – M26 – M25 = $261,445 (at 25% growth)
 Be sure that your “Totals” values are calculated correctly and that your balance sheet
“balances.”
 Note that Total Assets in the pro-forma no longer equals 2009 Total Assets multiplied by one
plus the growth rate. Why? Because BURRITOJOINT will use cash to buy new assets.
Record the results for the liquidity, profitability and efficiency ratios from the projection in Table
2 on the “Tables” tab.
(b) Next calculate the maximum sales growth BURRITOJOINT could finance using existing cash.
Assume the minimum cash holdings can be no less than 10% of total assets (BURGERHAVEN
holds less than 6%) and that any additional cash may be used to finance growth. (Note we will
still assume that A/P growth is spontaneous, so that portion of growth will be financed by
suppliers.)

To do this, first copy and create a new spread sheet (called Max Growth) so you don’t lose
the results from above.
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
Change the sales growth value in Cell C79 until the common-size pro-forma “Cash” in cell
N24 is 10% of Total Assets. You may want to use the “Solver” or “Goal Seek” Excel
functions instead of changing the cell manually.
Record the results for the liquidity, profitability and efficiency ratios from the projection in Table
2 on the “Tables” tab.
Part 3: Growth Analysis
We now have the ability to compare the effects of differing growth rates and financing policies on the
performance of the company. For each growth scenario, place the short-term solvency ratios and the
profit, leverage and efficiency measures you calculated in Table 2 on the Tables tab.
1. Compare the short-term solvency for 25% sales growth under the 2 financing options (selling equity
or using existing cash). Under which option does the firm have better short-term solvency? How
does the resulting short term-solvency compare to the current 2009 values? How does it compare to
BURGERHAVEN?
Compare the long-term solvency (EM). Are the long-term solvency results consistent with the shortterm solvency results?
2. Compare the profitability (ROE) for 25% sales growth under the 2 financing options. Under which
option is the profitability greater? Explain why.
3. Compare the overall efficiency (ROA) for 25% sales growth under the 2 financing options. Under
which option is the ROA greater? Explain why.
4. Compare the components of overall efficiency (AT and PM) for 25% sales growth under the 2
financing options. How do the different financing options affect the components of efficiency?
Explain why.
5. Look at the results for max growth using cash. How do the solvency, profitability and efficiency
measures under this scenario compare to the other results?
6. Given your analysis, write a brief recommendation suggesting a financing policy. Support your
recommendation with the results from the analysis.
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