730 250 Question 3 The following are the accounts of Big Mama plc, a company that manufactures kitchen equipment, for the year ended 31 December 2020. Statement of comprehensive income for years ended 31 December 2020 2019 5000 3000 Profit before interest and tax 2,200 1,570 Interest expense 170 150 Profit before tax 2.030 1.420 Taxation 520 Profit after tax 1.300 900 Dividends paid 250 Retained profit 1.050 650 Statements of financial position as at 31 December 2020 2020 2019 S000 $000 Non-current assets (written-down value) 6,350 5,600 Current assets Inventories 2,100 2,070 Receivables 1.710 1.540 10,160 9,210 Creditors amounts due within one year Trade payables 1,040 1,130 Taxation 550 450 Bank overdratt 370 Total assets less current liabilities 8.200 7,150 Creditors amounts due after more than one year 10% debentures 2021/2022 1.500 1.500 6,700 5,650 Capital and reserves Share capital: ordinary shares of 50c fully paid up 3.000 3.000 Share premium 750 750 Retained earnings 2.950 1.900 6,700 5.650 The directors are considering two schemes to raise $6,000,000 in order to repay the debentures and finance expansion estimated to increase profit before interest and tax by $900,000. It is proposed to make a dividend of 6c per share whether funds are raised by equity or loan. The two schemes are: 1. an issue of 13% debentures redeemable in 30 years, 480 2. a rights inue at $1.50 per share. The current market price is $180 per share (2019: S1.50, 2018: $1.20) Required: 1. Prepare: 1. the return on equity, ii. three ratios that a potential: a) investor would be interested with; and b) a long-term lender would be interested in. iii. a brief report on the performance and state of the business using the ratios calculated above and explain any weaknesses in these ratios. 20 marks 2. Based on your analysis above, your advice is being sought by management as to which scheme they should adopt. Your explanation may include other information that may be required when making the decision. 10 marks