Question
SCENARIO Networkz Plc, is a financial services company operating in the UK Fin Tech sector. Its Executive Board is currently considering the expansion of operations
SCENARIO
Networkz Plc, is a financial services company operating in the UK Fin Tech sector. Its Executive Board is currently considering the expansion of operations into the European market as turnover in the UK market appears to have stabilised. However, whilst this fits with Networkz Plcs 5-year strategic plan, the expansion requires a capital investment of 500,000.
The following information is available for Networkz Plc.
TABLE 1 Extract Profit and Loss Account for year ended 31 December
| 2020 | 2019 |
| 000 | 000 |
Revenue | 7,050 | 7,150 |
Cost of sales | (3,750) | (3,100) |
Gross profit | 3,300 | 4,050 |
Operating expenses | (1,200) | (1,100) |
PBIT | 2,100 | 2,950 |
Finance costs | (500) | (590) |
PBT | 1,600 | 2,360 |
Tax | (320) | (472) |
Profit for year | 1,280 | 1,888 |
TABLE 2 Extract Balance Sheet as at 31 December
| 2020 | 2019 |
| 000 | 000 |
NON-CURRENT ASSETS |
|
|
PPE | 20,000 | 17,720 |
Investments | 4,000 | 5,500 |
|
|
|
CURRENT ASSETS |
|
|
Inventories | 1,500 | 1,250 |
Trade receivables | 1,250 | 1,000 |
Cash and cash equivalents | 1,350 | 2,950 |
|
|
|
NON-CURRENT LIABILITIES | 10,050 | 11,000 |
|
|
|
CURRENT LIABILITIES | 3,450 | 3,000 |
|
|
|
EQUITY |
|
|
Share capital | 450 | 450 |
Share premium | 5,000 | 5,000 |
General reserves | 4,250 | 4,250 |
Retained earnings | 4,900 | 4,720 |
| 14,600 | 14,420 |
TABLE 3 Working capital ratio results
| 2020 | 2019 |
Trade receivable days | 65 days | 51 days |
Trade payable days | 97 days | 88 days |
Inventory holding days | 146 days | 147 days |
ADDITIONAL INFORMATION
- Taxation is at a rate of 20% over 2019 and 2020 and set to remain the same in 2021.
- Dividends paid for the year in 2019 and 2020 remained constant at 90,000.
- There are 9m fully paid ordinary shares in issue in 2019 and 2020.
- There was an investment in PPE in November 2020.
- Trade payables for year ending 2020 and 2019 are 1,000,000 and 750,000 respectively.
CAPITAL FUNDING OPTIONS
Networkz Plcs financial management team are considering two funding options:
Option 1 Debt
To raise the capital by securing a Debenture (interest only) loan. The details are:
- 500,000 over 5 years at an interest rate of 1.7%pa.
Option 2 Equity
To raise the capital by selling ordinary shares. The details are:
- 10,000,000 ordinary shares @ 0.05 per share (nominal value).
Networkz Plc plans to maintain the same dividend rate per share.
REQUIRED
As part of Networkz Plcs financial management team you must complete the following tasks.
TASK 1
- Calculate the ratio results for two consecutive years, 2019 and 2020, using the information provided in the extract statements (Table 1, 2 & 3). Calculations must be shown in an appendix.
Ratios to be calculated are:
- Gross profit margin
- Non-current asset turnover
- Operating profit margin
- Earnings per share
- Gearing
- Acid test
- Interest cover
- Return on Equity
- Return on capital employed
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