WOODEN TOYS LTDis reviewing its current short term sources of finance. To date, the company has acquired a large bank overdraft. Given concerns expressed by the company's bank, Wooden Toys Ltd is concerned that their bank overdraft will be renewed on less favourable terms. As a result, the company is keen to reduce its bank overdraft by employing other short term sources of finance. During this year, to the 31^stMarch 2020, the company had sales of 5 million, all on credit, while cost of sales was 3.2 million. The current assets and current liabilities of Wooden Toys Ltd on the 31^stof March 2020 were as follows:

'000

'000

Inventory

800

Trade receivables

940

1,740

Trade payables

290

Bank overdraft

740

1,030

Net current assets

710

Wooden Toys Ltd has forecast that credit sales will remain at 5 million for the forthcoming year to the 31^stMarch 2021, while cost of sales will fall to 55% of sales. The company expects current assets to consist of inventory and trade receivables, and current liabilities to consist of trade payables and the company's bank overdraft. Wooden Toys Ltd is planning to achieve the following target working capital ratio values for the year to the 31^stMarch 2021:

Inventory days

45

Trade receivables days

55

Trade payables days

50

Current ratio

1.5 times

REQUIRED:

(a)Calculate the total amount of finance that Wooden Toys Ltd could generate by increasing its current trade payables into line with the target trade payables days and reducing its current investment in inventory and trade receivables into line with the target inventory days and the target trade receivables days for 2021.

(b)Calculate the sales to net working capital ratio for Wooden Toys Ltd in 2020 and 2021.

(c)Calculate the expected bank overdraft value for Wooden Toys Ltd in 2021 if the target working capital ratio values are met.(14.5 marks)