Russell Ltd installs and services heating and ventilation systems for commercial premises.
The business€™s most recent statement of financial position and income statement are as follows:

The business wishes to invest in more machinery and equipment to enable it to cope with an upsurge in demand for its services. An additional operating profit of £120,000 a year is expected if an investment of £600,000 is made in plant and machinery.
The directors are considering an offer from venture capitalists to finance the expansion programme.
The finance will be made available immediately through either
— an issue of £1 ordinary shares at a premium on nominal value of £3 a share; or
— an issue of £600,000 10 per cent loan notes at nominal value.
The directors wish to maintain the same dividend payout ratio in future years as in past years whichever method of finance is chosen.

Required:
(a) For each of the financing schemes:
1 prepare a projected income statement for next year;
2 calculate the projected earnings per share for next year;
3 calculate the projected level of gearing as at the end of next year.
(b) B riefly assess both of the financing schemes under consideration from the viewpoint of the existing shareholders.

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Statement of financial position £000 ASSETS Non-current assets Property, plant and equipment 741.8 Current assets Inventories at cost 293.2 Trade receivables 510.3 803.5 Total assets 1,545.3 EQUITY AND LIABILITIES Equity £1 ordinary shares 400.0 General reserve 50.2 Retained eamings 382.2 832.4 Non-current liabilities Borrowings – 12% loan notes (repayable in 5 years' time) 250.0 Current liabilities Trade payables 199.7 Taxation 128.0 Borrowings – bank overdraft 135.2 462.9 Total equity and liabilities 1,545.3