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		1,250
Trade receivables		1,000
Cash and cash equivalents		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 2Equity

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.

TASK2

Using the 2020 information only provided in Table 2 and 3 you are to:

• Calculate the financial consequences of each capital funding option (Option 1 and Option 2).

• Analyse the results and critically review each option in terms of impact on Networkz Plc’s capital structure and value of business.

• Evaluate two alternative funding options that Networkz Plc could consider.

Answer rating: 100% (QA)

Consequences of the funding option Option 1 Debt The current capital structure stands at 41 de... View the full answer