Assume you are an external consultant and today is 1st January 2022.

Tello Electronics is the only LED TV brand that still manufactures its products in the UK. From their production line in Bishopsgate Business Park, County Coventry, they make all of their LED TVs from 16″ to 85″. Tello products are distributed throughout the UK and beyond.

Tech Track 100 ranks Britain’s fastest-growing tech companies. This ranking is based on sales growth over the latest three years. Companies on the league table have developed a diverse range of products and services. Tech Track 100 is compiled by Fast Track and published in The Sunday Times each September, with a national awards event in November.

In order to remain a high growing speed and profitability target, Tello believes that they should improve the quality of services, increase employee capabilities and expand production capabilities. Tello has decided that the company should expand the company’s product line. Some factories will be expanded. It is believed that expansion costs will total £18 million.

The company is considering two options to finance the £18,000,000 for the expansion.

1) A rights issue at £1.50 per share. Issue costs on the share can be ignored.

2) A business loan of £18 million from Lloyds bank at a fixed interest rate of 4% per annum. The loan would be secured against the land and buildings owned by Tello Electronics and would be repayable on maturity in 25 years’ time.

It has been agreed that this expenditure will be capitalized under Non-Current Assets and will be depreciated over six years on a straight-line basis. The expansion will have no residual value after the six years.

The forecast financial statements are given in the appendix at the end of this document.

You have obtained the following forecast information regarding 2022:

1 CEO of the company expects that Costs and expenses, excluding depreciation, will increase by 8% per annum cause of the expansion of the company’s product line. However, revenue will increase at least by 10% in 2022

2 Finance costs are expected to remain unchanged, other than on new debt.

3 The ratio of trade receivables to revenue will remain the same for next year (2022).

4 The ratio of trade payables to costs and expenses (excluding depreciation) will also remain the same for next year (2022).

5 The value of inventories is expected to be increased by £5M.

6 The existing non-current assets are not depreciated in Tello Electronics’ accounting records in 2021 as they are land and buildings. All other assets are either rented or leased on operating leases and therefore are not depreciated.

7 The dividend payout ratio will remain unchanged.

8 The UK government announced that the Corporation Tax main rate for the years starting 1 January 2021 and 2022 would remain at 20%, and depreciation is allowed as a tax-deductible expense.

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Tello has four financial objectives as follows:

• increase profit after tax at least 9%

• maintain a current ratio of at least 1.6:1

• earnings per share at least £0.4 per share

• earn a return on capital employed of 35% per annum

Required:

The Finance Director has asked you, as an external consultant, to prepare a report for presentation to the board of directors, which will include the following:

(i) forecast income statement, balance sheet, and cash flow statement for the year ending 31 December 2022 if the rights issue was used to finance the investment.

(ii) forecast income statement, balance sheet, and cash flow statement for the year ending 31 December 2022 if the loan was used to finance the investment.

(iii) a description and discussion of the meaning of 4 financial objectives that Tello are employing.

(iv) a discussion of whether the company is likely to achieve its financial objectives in the year ending 31 December 2022. You should include a suitable recommendation for financing the investment.

(v) Non-financial, as well as financial, performance measures are essential to Tello for implementing its strategy and achieving its profitability target. Select two measures for each of the three non-financial perspectives of a balanced performance card and give a justification for the usefulness of each.

Note: forecast income statements, cash flow statements, balance sheets, and any other detailed calculations should be included in an appendix to the main report. Any interest on negative cash balances can be ignored.