Alsunga Ltd is a small, profitable owner-managed company which is seeking finance for a planned expansion. A local bank has indicated that it may be prepared to offer a loan of 100,000 at fixed annual rate of 9%. Alsunga Ltd would repay 25,000 of the capital each year for the next 4 years.

Annual interest rate would be calculated on the opening balance at the start of each year, first instalment shall be on January 1, 2023. Current financial information on Alsunga Ltd is as follows:

Data for year 2022 (current year)
Revenues (budgeted for 2022),	210,000
Earnings before interest payments and tax - EBIT, %	20%
Annual income tax rate	25%
Average overdraft,	20,000
Average interest on overdraft	10% p.a.
Dividend payout ratio	50%
Shareholders funds (end of 2022),	200,000
Market value of non-current assets,	180,000

As a result of the expansion, revenue would increase by 45,000 per year for each of the next 4 years, while net profit margin would remain unchanged. No tax allowable depreciation would arise from investment of the amount borrowed.

Alsunga Ltd currently as no other debt than the existing and continuing overdraft and has no cash investments. The non-current assists largely of the building from which the company conducts its business. The current dividend payout ratio has been maintained for several years.

You are required:

A. Assuming that Alsunga Ltd is granted the loan, calculate the following ratios for each of the next 5 years:

(i) Interest coverage ratio;

(ii) Medium to long-term debt to equity ratio; (iii) Return on equity - ROE;

(iv) Return on capital employed -ROCE.

Comments: You need to start with drafting financial statements and its projections Income Statement, Cash Flow. Then it will be possible to do ratio calculations and analysis.

B. Comment on the financial implications for Alsunga Ltd of accepting the bank loan on the terms indicated above