12.6 The following information is provided relating to the affairs of two companies engaged in similar trading activities:

Hot Ltd Cold Ltd

£ £

Ordinary share capital 800,000 500,000 15% debentures 200,000 500,000 Each company earned a trading profit before finance charges of £110,000 in year 1 and £190,000 in year 2. Corporation tax is charged at 50 per cent on the trading profits after finance charges have been deducted. The company pays out as dividends its entire post-tax profits, i.e. there are no reserves.

(a) Summary profit and loss accounts, dealing with the results of each of the two companies’ activities during years 1 and 2, so far as the information given above permits.

(b) Calculations of profits before tax expressed as percentages of ordinary share capital for each company in respect of both years 1 and 2.

(c) A discussion of the returns earned for shareholders over the two-year period.