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 stabilized. However, whilst this fits with Networkz Plc’s 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 Plc’s 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 Plc’s financial management team you must complete the following tasks.

TASK 1

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

Answer rating: 100% (QA)

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