01: Short Form Case Study : Clayton Inc. Clayton Inc., is engaged in the business of manufacture and sale of consumer products. Due to COVID-19 pandemic, company's top line sales is expected to grow @ 20% per annum over the next two years as its hygiene line products have outperformed company's rest of the product portfolio mainly high end life style needs. In the Annual General Meeting (AGM) for CY2020, the Board of Directors that finalized financial statements for the year, advised management team to maintain strong controls and vigilance to keep costs. The Board stressed the need to lift the inventory turnover ratio in CY2021. Compared to industry average of 4.00 times, Clayton's inventory turnover remains low at 3.00 times. Therefore, increasing this key ratio will reduce the need for additional working capital financing and help keep finance cost - interest cost on short term bank loans. Subsequent to the AGM, analysis carried out by Finance and presented to the Sub-Committee on Financing, asset-to-sales (A/S) was planned to be maintained at 1.5 times, whereas liabilities-to-sales (L/S) to be maintained at 0.40 times. It is expected that minimum 10% net profit margin will be achieved in CY2021 and CY2022. All new projects which were planned in third quarter of CY2019 and were to be implemented in first half of CY2020 were subsequently postponed in view of COVID-19's expected fall out on the demand for company's life style product line which is typically demanded by high end consumers. Expansion project in life style line would have consumed about 6 months and new product roll-out was expected at the end of CY2021. In view of initiative described above, sufficient cash flow generation is expected. Therefore, Clayton plans that dividend payout ratio will be maintained @ 45% unchanged from CY2020. Top line sales in CY2020 was USD 100 million and it is expected that company will conveniently achieve target growth of 20% per annum over the next two years on the back of continued strong demand for company's hygiene line products. Required: a) If Clayton operated at 96% of its capacity utilization which was well above the industry average of 80% during the same period. What could have been company's sales in CY2020, if they operated at 100% capacity utilization? b) Calculate additional funds needed (AFN) for CY2021. c) Calculate additional funds needed (AFN) for CY2022. d) In light of COVID-19 pandemic and company's key financials given above, what's your view point on company's operating performance? Substantiate your answer sighting proper reasons. e) Do you think that Board of Directors has rightly deferred expansion plans that related to life style needs of company's product portfolio? Why or why not? Explain with cogent reasons. f) Top 10% companies within Clayton's market segment have an inventory turnover ratio in range of 5.00- 6.00 times. Do you think Clayton's financial strategy is right and that increasing inventory turnover ratio to 4.00 times can produce required cut backs in bank borrowings and interest cost in CY2021 and CY2022? Why or why not? Substantiate your view point