Telford Engineers plc, a medium-sized Midlands manufacturer of automobile components, has decided to modernise its factory by introducing a number of robots. These will cost £20m and will reduce operating costs by £6m a year for their estimated useful life of 10 years starting next year (Year 10). To finance this scheme, the business can raise £20m by issuing either:

1 20 million ordinary shares at 100p; or 2 loan notes at 7 per cent interest a year with capital repayments of £3m a year commencing at the end of Year 11.

Extracts from Telford Engineers’ financial statements appear below:

Summary of balance sheet at 31 December Year 6 Year 7 Year 8 Year 9

£m £m £m £m Non-current assets 48 51 65 64 Current assets 55 67 57 55 103 118 122 119 Equity 48 61 61 63 Non-current liabilities 30 30 30 30 Current liabilities Trade payables 20 27 25 18 Short-term borrowings 5 – 6 8 25 27 31 26 103 118 122 119 Number of issued 25p shares 80m 80m 80m 80m Share price 150p 200p 100p 145p Note that the short-term borrowings consisted entirely of bank overdrafts.

Summary of income statements for years ended 31 December Year 6 Year 7 Year 8 Year 9

£m £m £m £m Sales revenue 152 170 110 145 Operating profit 28 40 7 15 Interest payable (4) (3) (4) (5)

Profit before taxation 24 37 3 10 Taxation (12) (16) (0) (4)

Profit for the period 12 21 3 6 Dividends paid during each year 6 8 3 4 For your answer you should assume that the tax rate for Year 10 is 30 per cent, that sales revenue and operating profit will be unchanged except for the £6m cost saving arising from the introduction of the robots, and that Telford Engineers will pay the same dividend per share in Year 10 as in Year 9.

Required:

(a) Prepare, for each financing arrangement, Telford Engineers’ projected income statement for the year ending 31 December Year 10 and a statement of its share capital, reserves and loans on that date.