The University has also provided your class with two components of its most recent financialstatements of its machine-shop that produces chairs. Prior to COVID-19, the machine-shopcontributed 4% to the University’s income; the trend appears to be falling since.The University is contemplating purchasing some additional equipment at an initial cost of$30 million, which they hope will turn around the earnings fortunes of the machine-shop.Statement of Income for the period ending December 31:2019 2018$000 $000Revenue 50,000 50,000Cost of sales 31,000 30,000Gross profit 19,000 20,000Distribution costs 1,000 750Administrative expenses 3,000 1,750Operating profit before interest & tax 15,000 17,500Interest 4,000 3,800Operating before tax 11,000 13,700Taxation 3,300 4,000Profit for the year 7,700 9,700Statement of Financial Position as at December 31:2019 2018Assets $000 $000Property, plant & equipment 65,000 64,000Current assetsInventories 11,700 10,000Receivables 8,500 9,000Cash & cash equivalents 1,300 1,000Total current assets 21,500 20,000Total assets 86,500 84,000Equity & liabilitiesOrdinary share capital $1 each 35,000 35,000Reserves 5,000 1,200Total equity 40,000 36,20010% Loan notes (2014) 35,000 35,000Current liabilities 11,500 12,800Total equity & liabilities 86,500 84,000The purchase of the equipment is expected to increase annual sales by 55,000 chairs.Investment in replacement equipment would be needed after five-years. The financial data onthe additional units to be sold is as follows:5Selling price per unit $5,000Cost of production $2,000 Variable administrative and distributive expenses are expected to increase by$2,200,000 per year as a result of the increase in capacity. In addition to the initial investment in new equipment, $4,000,000 would need to beinvested in working capital The full amount of the initial investment in new equipment of $30,000,000 will giverise to capital allowances on a 25% per years reducing balance method. The scrapvalue of the equipment after five years is expected to be negligible. Tax liabilities are in the year in which they arise and the University machine-shoppays tax at 30% of annual profits. The Finance Director of the machine-shop has proposed that the $30.4 millioninvestment should be financed by an issue of loan notes at a fixed rate of 8% perannum. The machine-shop uses the after tax discount rate of 12% to evaluate investmentproposals. Straight- line depreciation method is used over the expected life of fixedassets. Average data for chair-making industry is as follows:o Gearing 100%o Interest covers 4 timeso Current ratio 2:1o Inventory days 90 days.Required:a) Suggest alternative sources of finance that the University could use, outlining theadvantages and disadvantages of each.b) Analyse and comment on the recent performance of the University machine-shopc) Calculate the effect on the gearing and interest cover of the University machine-shop offinancing the proposed investment with an issue of loan notes and compare your resultswith the sector averages.

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The University has also provided your class with two components of its most recent financial statements of its machine-shop that produces chairs. Prior to COVID-19, the machine-shop contributed 4% to
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