Extracts from Sardine plc’s Statement of income for the year ended 30 September 2011 are shown and particulars of capital employed, as at 30 September 2011, are shown. Assume that tax is calculated at 20% of profit.

Required:

(a) Calculate the extent of the company’s capital gearing.

(b) Identify how high gearing affects equity shareholders by working out the percentage fall in the retained profits (available for ordinary shares) if there is a 20% fall in operating profit.

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Ordinary shares 6% Preference shares Reserves 8% Loan notes £'000 4,000 3,000 500 7,500 5,000 12,500