Question 2 Corway Company plans to raise $5 million in order to expand its existing chain of retail outlets. It can raise the finance by issuing 10% bonds redeemable after 11 years, or by a rights issue at $4.00 per share. The financial statements of Corway Company for the year that has just ended 31 December 2020 are as follows: Income statement Sales revenue Cost of sales Gross profit Administration expenses Profit before interest and tax Interest Profit before tax Taxation at 30% Profit after tax Dividends Retained earning $000 50,000 30,000 20,000 14,000 6.000 300 5,700 1,710 3,990 2,394 1,596 Statement of financial position Net non-current assets Net current assets 12% bonds (redeemable in 6 years) $000 20,100 4,960 2,500 22,560 Ordinary shares (par value 25 cents) Retained earnings 2,500 20,060 22,560 The expansion of business is expected to increase sales revenue by 12% in the first year. Variable cost of sales makes up 85% of cost of sales. Administration costs will increase by 5% due to new staff appointments. Corway Company has a policy of paying out 60% profit after tax as dividends and has no overdraft. Required: a) For each financing proposal, prepare the forecast statement of profit or loss after one additional year of operation. b) Evaluate and comment on the effects of each financing proposal on the financial gearing and earnings per share of the company