Russell Ltd installs and services heating and ventilation systems for commercial premises. The business’s most recent balance sheet and income statement are as follows:

Balance sheet

£000 £000 Non-current assets Property, plant and equipment Machinery and equipment at cost 883.6 Less Accumulated depreciation 328.4 555.2 Motor vehicles at cost 268.8 Less Accumulated depreciation 82.2 186.6 741.8 Current assets Inventories at cost 293.2 Trade receivables 510.3 803.5 Total assets 1,545.3 Equity

£1 ordinary shares 400.0 General reserve 50.2 Retained profit 382.2 832.4 Non-current liabilities Borrowings – 12% loan notes (repayable Year 10/11) 250.0 Current liabilities Trade payables 199.7 Taxation 128.0 Borrowings – Bank overdraft 135.2 462.9 Total equity and liabilities 1,545.3 Income statement for the year

£000 Sales revenue 5,207.8 Operating profit 542.0 Interest payable (30.0)

Profit before taxation 512.0 Taxation (25%) (128.0)

Profit for the year 384.0 Note:

Dividend paid during the year 153.6 The business wishes to invest in more machinery and equipment in order to cope with an upsurge in demand for its services. An additional operating profit of £120,000 a year is expected if an investment of £600,000 is made in plant and machinery.

The directors are considering an offer from venture capitalists to finance the expansion programme. The finance will be made available immediately through either:

15.5 610 EXERCISES

(i) an issue of £1 ordinary shares at a premium on par of £3 a share; or

(ii) an issue of £600,000 10 per cent loan notes at par.

The directors wish to maintain the same dividend payout ratio in future years as in past years whichever method of finance is chosen.

Required:

(a) For each of the financing schemes:

(i) prepare a projected income statement for next year;

(ii) calculate the projected earnings per share for next year;

(iii) calculate the projected level of gearing as at the end of next year.