Question 1: Exclavier Ltd's AFN (By POS Method) Exclavier Ltd, manufacturer of massive earth-moving equipment is expecting its sales to rise by 40 per cent in the year to August 3072023. Exclavier has a 45% dividend payout ratio and has a tax rate of 30%. Exclavier's fixed assets are lumpy, and the firm has a fixed asset utilisation of 80%. As output cannot be produced from half of a plant, the firm must increase production with a whole new plant or more. Each new plant will cost $100,000,0001 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 plants with 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 its balance sheet (intangible assets). In addition please assume that the increase in interest expense will be 40%. With respect to the sources of funding, the management of Exclavier Ltd prefer to take on new debt first rather than new equity. In addition, extra current debt is preferred to extra long-term debt in this firm's case. However, Exclavier has two restrictions on how it can raise additional funds: 1. The debt ratio cannot be greater than 0.55 1 In order to avoid a more complex calculation, please assume that the $100,000,000 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 cost. In other words, this is a net fixed assets value. 2. The current ratio cannot be less than 1.8 (Although it may currently be in technical breach of this restriction, Exclavier must not be so in 2018. Assume the trustee of the existing bond has made that ruling.) [Note the figures in these financial statements are in thousands!] Required: (a) Use the percentage of sales method to create a pro forma income statement and pro forma balance sheet for Exclavier Ltd for the 30th August 2023. (Note that this is not the direct (equation) method and you cannot use the direct method's assumption that the cost of net fixed assets can be scaled up smoothly once you have reached full capacity). 16 marks (b) Determine the percentage of fixed asset utilisation Exclavier Ltd enjoys in August 2023. 4 marks Total: 20 marks Question 1: Exclavier Ltd's AFN (By POS Method) Exclavier Ltd, manufacturer of massive earth-moving equipment is expecting its sales to rise by 40 per cent in the year to August 3072023. Exclavier has a 45% dividend payout ratio and has a tax rate of 30%. Exclavier's fixed assets are lumpy, and the firm has a fixed asset utilisation of 80%. As output cannot be produced from half of a plant, the firm must increase production with a whole new plant or more. Each new plant will cost $100,000,0001 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 plants with 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 its balance sheet (intangible assets). In addition please assume that the increase in interest expense will be 40%. With respect to the sources of funding, the management of Exclavier Ltd prefer to take on new debt first rather than new equity. In addition, extra current debt is preferred to extra long-term debt in this firm's case. However, Exclavier has two restrictions on how it can raise additional funds: 1. The debt ratio cannot be greater than 0.55 1 In order to avoid a more complex calculation, please assume that the $100,000,000 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 cost. In other words, this is a net fixed assets value. 2. The current ratio cannot be less than 1.8 (Although it may currently be in technical breach of this restriction, Exclavier must not be so in 2018. Assume the trustee of the existing bond has made that ruling.) [Note the figures in these financial statements are in thousands!] Required: (a) Use the percentage of sales method to create a pro forma income statement and pro forma balance sheet for Exclavier Ltd for the 30th August 2023. (Note that this is not the direct (equation) method and you cannot use the direct method's assumption that the cost of net fixed assets can be scaled up smoothly once you have reached full capacity). 16 marks (b) Determine the percentage of fixed asset utilisation Exclavier Ltd enjoys in August 2023. 4 marks Total: 20 marks
