You are the Finance Director of Southern Sawmills Plc. The company is engaged in the manufacture of timber products and has operated successfully for a long time during which it has built up an impressive list of corporate clients.

The Board of Directors are aiming to grow the business, possibly by acquiring a competitor. An opportunity has arisen to buy Timber Frame Ltd, a business which uses timber as a core material in its development of eco-friendly homes. The purchase price would be 18 million.

Your Managing Director is very interested in buying Timber Frame Ltd. Ahead of the next board meeting, the Managing Director has discussed the situation with you. Looking at the reports and accounts for each company, you estimate that the profit before interest and taxation will increase by 6m as a result of buying Timber Frame Ltd.

Statement of Financial Position for Southern Sawmills Plc as at 31 December 2016:

	m	m	m
Fixed Assets:
Land & buildings (at cost)		22
Plant & machinery (at cost)	15
Less: accumulated depreciation	(6)	9	31
Current Assets:
Stock (at cost)		16
Debtors		7
Cash		1
		24
Current Liabilities:
Trade creditors	6
Proposed dividend	1
Taxation	2	9	15
			46
Long Term Liabilities:
Loans (11%)			12
			34
Capital and Reserves:
Ordinary Shares (0.50)			5
Retained Profit			29
			34

Extracts from income statement for the year ended 31 December 2016:

	m
Turnover	82.00
Profit before interest and tax	12.00
Interest payable	1.32
Profit before taxation	10.68
Taxation	3.52
Profit after taxation	7.16
Dividends	1.00
Retained Profit	6.16

So that you are ready to provide appropriate guidance to the directors, you have approached the companys bank to establish whether they would consider providing finance for the purchase. The bank has agreed to provide 18 million. However, they have suggested three different ways in which they could provide this finance:

(i)	The bank would purchase 6 million ordinary shares in Southern Sawmills Plc;
(ii)	The bank would purchase 6 million 9% preference shares at par and 12 million 13% debentures in Southern Sawmills Plc;
(iii)	The bank would purchase 3 million ordinary shares and 12 million 13% debentures in Southern Sawmills Plc.

You expect that Southern Sawmills Plc will maintain dividend per share at its current level. The rate of corporation tax is 33%. (assumed)

Required:

(a)	Prepare an income statement for Southern Sawmills Plc for the year ended 31 December 2017 for each of the three financing schemes.
(b)	In the interests of the shareholders of Southern Sawmills Plc, calculate the earnings per share and the gearing ratio for each of the possible financing schemes and compare these results with the existing financial situation.
(c)	Comment on your calculations in (b) and recommend which financing scheme will be most beneficial.