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TFR (June 07 – Amended)

TFR is a small, profitable, owner-managed company which is seeking finance for a planned expansion. A local bank has indicated that it may be prepared to offer a loan of $100,000 at a fixed annual rate of 9%. TFR would repay $25,000 of the capital each year for the next four years.

Annual interest would be calculated on the opening balance at the start of each year. Current financial information on TFR is as follows:

Current revenue:


Net profit margin:


Annual taxation rate:


Average overdraft:


Average interest on overdraft:

10% per year

Dividend payout ratio:


Shareholders' funds:


Market value of non-current assets


As a result of the expansion, revenue would increase by $45,000 per year for each of the next four years, while net profit margin would remain unchanged. No tax allowable depreciation would arise from investment of the amount borrowed.

TFR currently has no other debt than the existing and continuing overdraft and has no cash or near-cash investments. The non-current assets consist largely of the building from which the company conducts its business. The current dividend payout ratio has been maintained for several years.


A. Assuming that TFR is granted the loan, calculate the following ratios for TFR for each of the next five years:

(i) interest cover
(ii) medium to long-term debt/equity ratio
(iii) return on equity
(iv) return on capital employed.

B. Comment on the financial implications for TFR of accepting the bank loan on the terms indicated above.

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