15.6 One of your main suppliers of raw materials is a family-owned company. It is the only available supplier and your company purchases 60 per cent of its output from it. Currently, it requires extra finance to re-equip its factory with modern machinery, which is expected to cost EUR 8 million. The machinery’s life is expected to be 10 years, and savings, before depreciation, arising from its installation, will be EUR 3 million per annum. It has approached you to see if you are able to help and has mentioned that if it can acquire the new equipment your company will be able to share in the benefits through reduced prices for its purchases. An extract of some recent financial statements of the supplier company appears as follows:

Income statement data (amounts in millions of euro)
for the years ended 30 September 2005 2004 2003 Sales 9.5 8.0 11.5 EBIT 1.9 (2.0) (0.2)
Interest charge 1.5 2.4 1.2 EBT 0.4 (4.4) (1.4)
There was no charge for tax in these years nor any dividend paid out.
Balance sheets at 30 September (amounts in millions of euro)
2005 2004 2003 Non-current assets PPE 24.0 23.0 22.1 Deduct Accumulated depreciation (14.0) (12.0) (10.0)
PPE, net 10.0 11.0 12.1 Current assets Inventory 3.8 3.5 4.3 Trade receivables 4.1 2.6 2.8 7.9 6.1 7.1 Deduct Current liabilities Trade payables (1.9) (1.7) (1.4)
Bank overdraft (4.2) (4.1) (2.7)
(6.1) (5.8) (4.1)
Net current assets 1.8 0.3 3.0 Total assets less current liabilities 11.8 12.2 14.9 Deduct Long-term loan (7.4) (8.2) (6.5)
Net assets 4.4 4.0 8.4 Financed by:
Owners’ equity Capital 1.0 1.0 1.0 Retained earnings 3.4 3.0 7.4 4.4 4.0 8.4

(a) Calculate for each year and comment upon each of the following ratios for the supplier:
i. ROTA ii. interest cover iii. debt ratio.

(b) Using the ratios you have determined and any other you consider relevant, prepare a short report stating the financial assistance, if any, your company would be prepared to provide to the supplier. Your recommendations should also state the form that the assistance should take, its amount, and what terms and conditions your company would seek to impose.