The following are the accounts of Bouncy plc, a company that manufactures playground equipment, for the year ended 30 November 2020.

Profit and loss accounts for the year ended 30 November.

2020 2019

$ $

Profit before interest and tax 2 200 1 570

Interest expense 170 150

Profit before tax 2 030 1 420

Taxation 730 520

Profit after tax 1 300 900

Dividends paid 250 250

Retained profit 1 050 650

Balance sheets as at 30 November 2020

Fixed 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 overdraft 370 480

Total assets less current liabilities 8 200 7 150

Creditors: amounts due after more than one year

10% debentures 2027/2028 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;
2. A rights issue of $1.50 per share. The current market price is $1.80 per share (2019: $1.50; 2018: $1.20).

Required:

1. Calculate the return on equity and any three investment ratios of interest to a potential investor.
2. Calculate three ratios of interest to a potential long-term lender.
3. Report briefly on the performance and state of the business from the view point of a potential shareholder and lender using the ratios calculated above and explain any weaknesses in these ratios.
4. Advise management which scheme they should adopt on the basis of your analysis above and explain what other information may need to be considered when making the decision.