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 19^th 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[1] 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)

2.The current ratio cannot be less than 1.5

[Note the figures in these financial statements are in thousands!]

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 19^th August 2021. (Note that this is not the equation method).

(b)Determine the percentage of fixed asset utilisation Septimus Ltd enjoys in August 2021.

[1] 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 cost