Question

E14-20 Analyzing alternative plans to raise money

SB Electronics is considering two plans for raising $4,000,000 to expand operations. Plan A is to issue 9% bonds payable, and plan B is to issue 500,000 shares of common stock. Before any new financing, SB Electronics has net income of $350,000 and 300,000 shares of common stock outstanding. Management believes the company can use the new funds to earn additional income of $700,000 before interest and taxes. The income tax rate is 30%.

Analyze the SB Electronics situation to determine which plan will result in higher earnings per share. Use Exhibit 14-6 as a guide.

Format the spreadsheet to resemble Exhibit 14-6 on page 754 of your text.

Remember: The object of this assessment is to use Excel. Let Excel do the math for you, or it may result in a loss of points.  

Answer 1

Ans.                                               Evaluation of the proposal (in $)

                                                                        Debt plan                 Equity plan

Existing Income after tax                                     350000                     350000

Additional income after interest and tax

For Debt (700000-360000)X.70          238000 -

For equity (700000)X.7                                               -                              490000

Net income after tax (a)                                          588000    840000

No of share outstanding (b)                                     300000                       800000

EPS (a/b)                                                                1.96                           1.05

Comment : Plan A is better than plan B , for funding raising through is Bond 9% is better than plan of equity funding raising.