The following information is provided for Bessemer Ltd which operates in an industry subject to marked variations in consumer demand.

(i) Shareholders' equity at 30 September 2014: $£ 000$

$\begin{array}{ll}\text { Issued ordinary shares of } £ 1 \text { each fully paid } & 5,000\end{array}$

\begin{tabular}{ll}

Retained profits & $\underline{1,650}$ \\

\hline

\end{tabular}

There were no loans outstanding at the date of the statement of financial position.

(ii) Income statement extracts: year to 30 September 2014: $£ 000$

$\begin{array}{ll}\text { Net profit before tax } & 900\end{array}$

Less Corporation tax $\quad \underline{270}$

(iii) Changes in retained profits: year ending 30 September 2014:

Retained profit at 1 October 2013 1,620 Dividends paid during year ending 30 September 2014

$(600)$

1,020 Profit after tax for year ending 30 September 2014 Retained profit at 30 September $2014 \quad \underline{\underline{1,650}}$

(iv) The directors are planning to expand output. This will require an additional investment of $£ 2,000,000$ which may be financed either by issuing $1,000,000$ ordinary shares each with a nominal value of $£ 1$, or by raising a $12 \%$ loan note.

(v) Forecast profits before interest charges, if any, for the year to 30 September:

$£ 000$

2015 1,800

$2016 \quad 500$

$2017 \quad 2,200$

A corporation tax rate of $30 \%$ on reported profit before tax may be assumed; the directors plan to pay out the entire post-tax profit as dividends.

\section*{Required:}

(a) The forecast dividends for each of the next three years and year-end statement of financial position extracts, so far as the information permits, assuming that the expansion is financed by:

(i) issuing additional shares; or

(ii) issuing loan notes.

(b) Calculate the forecast return on shareholders' equity, for each of the next three years, under the alternative methods for financing the planned expansion.

(c) An assessment of the merits and demerits of the alternative methods of finance based on the calculations made under

(a) and

(b) and any other relevant methods of comparison.

\section*{(Institute of Chartered Secretaries and Administrators)}