Question 2:BossyBoot's AFN (By Equation Method)

BossyBoots Ltd operates in a similar business to Septimus Ltd; and BossyBoot's chief financial officer is at lunch with her CEO, who suddenly asks the question:"What additional funding would we require at BossyBoots, if we were able to increase our sales by 30 percent in competition with Septimus?"

The CFO knows that BossyBoots profit margin is 8%, and that sales for the year ending the 31st July 2020 are $19,500,000, and that the firm's fixed assets are operating at 90% capacity.The firm's dividend payout ratio is 50%.The CFO also has a printout of the 2020 balance sheet with her:

Required

The CFO needs to use the equation method to quickly calculate BossyBoots' AFN.Assume that you are this person and that this is your task

(a)What amount of non-spontaneous external funds will be needed during the year ending 31^st July 2021?

[8 marks]

(b)Distribute the AFN you calculated in part (a) (ie state what funds are raised from which sources) according to the following restrictions on BossyBoots Ltd and preferences:

Total debt/total assets may not increase above 58%

The current ratio (current assets / current liabilities) may not drop below 1.3

Raising new debt is preferred by BossyBoots Ltd to raising new equity

Increasing notes payable is preferred by BossyBoots Ltd to raising new long-term debt

[6 marks]

(c)What amount of non-spontaneous external funds will be needed during the year ending 31st July 2021 if BossyBoots Ltd believes its profit margin will be 12 percent and if it sets its dividend payout ratio at 60 percent?What percentage change is this in AFN from part (a)?