1 Question 1: Septimus Ltd's AFN (By POS Method) Septimus Ltd, the sole manufacturer of a popular new electronic item is expecting its level of sales to rise by 30 per cent in the year to August 19th 2021. Septimus has a 40% dividend payout ratio and has a tax rate of 28%. Unfortunately, Septimus fixed assets are lumpy, and the firm has a fixed asset utilisation of 80% only. As output cannot be produced from half of a machine, the firm must increase production with a whole new machine or more. A new machine will cost $100,000,000 and is capable of sustaining an asset turnover of 1.4 (which is not necessarily the same as the asset turnover of the firm's existing machines - which came from a different manufacturer). Currently the firm has four elderly machines with (in total) a depreciated value of $281,064,000, but which are capable of operating efficiently for many more years. The increase in sales will not affect the level of patents or goodwill that the firm has capitalised on it balance sheet. In addition please assume that the increase in interest expense will be 40%. With respect to the sources of funding, the thinking of the management of Septimus Ltd accords with the pecking order theory. In addition, extra current debt is preferred to extra long-term debt in this firm's case. However, Septimus has two restrictions on how it can raise additional funds: 1. The debt ratio cannot be greater than 0.5 (Although it currently is in technical breach of this restriction, it must not be in 2021. Assume the trustee of the existing bond has made that ruling) The current ratio cannot be less than 1.5 2. [Note the figures in these financial statements are in thousands!]* Septimus Ltd: Income Statement for the year ending 19th August 2020 (in Thousands) Sales 1,679,679 Cost of Sales (1,064,012) Gross Profit 615,667 General and Administrative costs (491,618) Operating Profit 124,049 Investment Income 2,526 Earnings before Interest and Tax 126,575 Interest expense (7,409) Profit before tax 119,166 Tax expense (33,366) Profit for the year 85,800 In order to avoid a more complex calculation, please assume that the $100,000 cost of each new machine is the value that the machine will have on the balance sheet after one year's accumulated depreciation has been subtracted from its historical coste le FINC 308 Assignment 1 Due 5pm Wednesday 19th Auguste Septimus Ltd: Balance Sheet as of 19th August (000) 2020 Cash and marketable securities Trade receivables Inventory Total Current Assets 101,393 16,929 254.606 372,928 Non-current tangible assets (Net) Non-current intangible assets Total non-current assets TOTAL ASSETS 281,064 21,040 302,104 675,032 Notes Payable Trade payables Other current liabilities (accruals) Total current liabilities 75,000 120,056 52,585 247,641 Non-current debt Total Liabilities 124, 145 371,786 Shareholders' Equity TOTAL LIABILITIES AND EQUITY 303,246 675,032 Required: (a) Use the percentage of sales method to calculate the additional funds needed by Septimus Ltd. This will entail creating a pro forma income statement and pro forma balance sheet for Septimus Ltd for the 19th August 2021. (Note that this is not the equation method). (b) Determine the percentage of fixed asset utilisation Septimus Ltd enjoys in August 2021. Total: 20 marks 1 Question 1: Septimus Ltd's AFN (By POS Method) Septimus Ltd, the sole manufacturer of a popular new electronic item is expecting its level of sales to rise by 30 per cent in the year to August 19th 2021. Septimus has a 40% dividend payout ratio and has a tax rate of 28%. Unfortunately, Septimus fixed assets are lumpy, and the firm has a fixed asset utilisation of 80% only. As output cannot be produced from half of a machine, the firm must increase production with a whole new machine or more. A new machine will cost $100,000,000 and is capable of sustaining an asset turnover of 1.4 (which is not necessarily the same as the asset turnover of the firm's existing machines - which came from a different manufacturer). Currently the firm has four elderly machines with (in total) a depreciated value of $281,064,000, but which are capable of operating efficiently for many more years. The increase in sales will not affect the level of patents or goodwill that the firm has capitalised on it balance sheet. In addition please assume that the increase in interest expense will be 40%. With respect to the sources of funding, the thinking of the management of Septimus Ltd accords with the pecking order theory. In addition, extra current debt is preferred to extra long-term debt in this firm's case. However, Septimus has two restrictions on how it can raise additional funds: 1. The debt ratio cannot be greater than 0.5 (Although it currently is in technical breach of this restriction, it must not be in 2021. Assume the trustee of the existing bond has made that ruling) The current ratio cannot be less than 1.5 2. [Note the figures in these financial statements are in thousands!]* Septimus Ltd: Income Statement for the year ending 19th August 2020 (in Thousands) Sales 1,679,679 Cost of Sales (1,064,012) Gross Profit 615,667 General and Administrative costs (491,618) Operating Profit 124,049 Investment Income 2,526 Earnings before Interest and Tax 126,575 Interest expense (7,409) Profit before tax 119,166 Tax expense (33,366) Profit for the year 85,800 In order to avoid a more complex calculation, please assume that the $100,000 cost of each new machine is the value that the machine will have on the balance sheet after one year's accumulated depreciation has been subtracted from its historical coste le FINC 308 Assignment 1 Due 5pm Wednesday 19th Auguste Septimus Ltd: Balance Sheet as of 19th August (000) 2020 Cash and marketable securities Trade receivables Inventory Total Current Assets 101,393 16,929 254.606 372,928 Non-current tangible assets (Net) Non-current intangible assets Total non-current assets TOTAL ASSETS 281,064 21,040 302,104 675,032 Notes Payable Trade payables Other current liabilities (accruals) Total current liabilities 75,000 120,056 52,585 247,641 Non-current debt Total Liabilities 124, 145 371,786 Shareholders' Equity TOTAL LIABILITIES AND EQUITY 303,246 675,032 Required: (a) Use the percentage of sales method to calculate the additional funds needed by Septimus Ltd. This will entail creating a pro forma income statement and pro forma balance sheet for Septimus Ltd for the 19th August 2021. (Note that this is not the equation method). (b) Determine the percentage of fixed asset utilisation Septimus Ltd enjoys in August 2021. Total: 20 marks