A-8.2 Telford Engineers Limited, a medium-sized manufacturer of automobile components, has decided to modernize its factory by incorporating a number of robots. These will cost $20 million and will reduce operating costs by $6 million a year for their estimated useful life of 10 years starting next year (Year 10). To finance this plan, the business can raise $20 million by either: Issuing 20 million common shares at $1 each, or Issuing long-term bonds at 14% interest a year, with capital repayments of $3 million a year commencing at the end of Year 11. 8-2 Excerpts from Telford Engineers' financial statements appear below: Summary Income Statements Including Addition to Retained Earnings for the years ended December 31 (\$ millions) For your answer you should assume that the corporate tax rate for Year 10 is 30%, that sales revenue and operating profit will be unchanged except for the $6 million 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' pro forma income statement, including the addition to retained earnings for the year ending December 31 , Year 10 , and the pro forma long-term debt and shareholders' equity portion of the balance sheet only on that date. Copyright @ 2012 Pearson Canada Inc. (b) Calculate Telford's pro forma earnings per share for Year 10 for both plans. (c) Which plan would you advise the business to adopt? You should give your reasons and state what additional information you would require