solution

You will need to modify your model slightly for it to perform correctly. In particular, you will need to add a conditional statement (IF, THEN) to prevent taking a depreciation deduction once NFA reaches zero. (Note: in extremely negative growth, you are selling assets so the balance of NFA could become negative if you depreciate assets aft er this occurs.) As was the case in Problem 1, you will need a conditional statement to prevent negative values of debt in the balance sheet aft er total debt is retired, and a separate line to calculate total dividends (regular dividend plus return of free cash fl ow). Aft er testing the model and making any necessary changes so that it balances, make the following additions and changes. Your model should be set up in such a way that it allows you to specify the proportions of debt and equity as a parameter in its assumptions section. Add several lines to your fi nancing module that allows you to vary the way the fi rm fi nances its funds needs—that is, allows you to choose between debt and equity fi nancing. Test it with three diff erent assumptions:

(a) All new fi nancing is done with long-term debt. Th e interest rate

is 5%.

 (b) You use a mix of debt and equity such that any new fi nancing is 60% debt and 40% equity.

 (c) All new fi nancing is with new equity. Test your model with varying sales growth rates.