In Strategic Modeling, you have a deficit and want to balance the model. Which two statements describe funding options you can take when you have a…

In financial modeling, a deficit signifies that the uses of funds (e.g., investments in assets, dividend payments) exceed the sources of funds (e.g., net income, depreciation). To balance the model, which is based on the fundamental accounting equation (Assets = Liabilities + Equity), one must either increase the sources of funds or decrease the uses. Increasing Debt or Equity (Option B) directly raises capital, thus increasing the sources of funds. Conversely, decreasing planned Asset purchases or reducing Dividend payouts (Option C) lowers the uses of funds. Both strategies effectively close the funding gap and bring the balance sheet back into equilibrium.

A. Decreasing Preferred Stock, a component of equity, reduces the sources of funds and would therefore worsen the deficit, not resolve it.

D. Increasing a Contra-Equity account, such as treasury stock, reduces total equity, which would exacerbate the funding deficit rather than balance it.

1. Oracle EPM Cloud Documentation

Administering Strategic Modeling for Oracle Enterprise Performance Management Cloud

"Defining Funding Options" section. This section explicitly states

"When there is a deficit

you can fund it with debt

equity

or a combination of the two." This directly supports option B.

2. Oracle EPM Cloud Documentation

Working with Strategic Modeling

"Setting Funding and Dividend Options" section. This documentation details how dividend policies are a key lever in managing funding requirements. Reducing dividends retains cash in the business

reducing the need for external financing and helping to cover a deficit

which supports the "decrease Dividends" part of option C.

3. Brealey

R. A.

Myers

S. C.

& Allen

F. (2020). Principles of Corporate Finance (13th ed.). McGraw-Hill Education. Chapter 29

"Financial Planning and Forecasting

" discusses the concept of the "plug" variable in pro forma financial statements. When a financing deficit exists

firms can balance their statements by either raising funds (e.g.

issuing debt/equity) or reducing the uses of funds (e.g.

cutting investment/dividends). This fundamental principle of corporate finance underpins the logic in both options B and C.