A$-8\mathrm{.}1$ B$.$C$.$ Fine Wines Limited is considering modernizing its winery at a cost of $$500$ million; the

upgrade will reduce cost of goods sold by $20\%.$ B$.$C$.$ Fine Wines can pay for the equipment by issu$-$

ing new equity or new bonds on January $2,2009.$ The debt would be at $10\%$ interest. Shares cur$-$

rently sell for $$50$ each. There are $10$ million shares currently outstanding. If new shares are issued,

the dividend would have to be raised next year by $25\%$ just to interest new shareholders in buying

the new shares. The $2010$ income statement and statement of retained earnings for B$.$C$.$ Fine

Wines are as follows:

B$.$C$.$ Fine Wines Limited

Income Statement

for the year ended December $31,2010$

$($in $ millions$)$

B$.$C$.$ Fine Wines Limited

Statement of Retained Earnings

for the year ended December $31,2010$

$($in $ millions$)$

Opening retained earnings, January $1,150$

Add: Net income $30$

Less: Dividends paid

Closing retained earnings, December $31$

$\frac{(20)}{160}$

Required:

$($a$)$ Prepare a pro forma income statement and statement of retained earnings for $2011$ under both the debt

issue and share issue options, assuming $2011$ sales match $2010$ sales and the tax rate remains unchanged.

$($b$)$ Calculate the $2011$ earnings per share under both options.

$($c$)$ Which option would you advise B$.$C$.$ Fine Wines Limited to pursue?