Question

2 of 5 (3 complete) HW Score: 75.93%, 91.87 of 121 pts -20 (similar to) Question Help 0 Electronics is considering two plans for raising $5,000,000 to expand operations. Plan A is to issue 9% bonds payable, and plan B is to issue 400.000 shares of mon stock. Before any new financing, RL Electronics has net income of $450,000 and 300,000 shares of common stock outstanding. Management believes the mpany can use the new funds to earn additional income of $900,000 before interest and taxes. The income tax rate is 20%. Analyze the RL Electronics situation to termine which plan will result in higher earnings per share. (Complete all answer boxes. Enter "O" for any zero balances. Round earnings per share amounts to the arest cent.) egin by completing the analysis below for plan A then plan B. Plan A: Issue $5,000,000 of 9% Bonds Payable Net income before new project Expected income on the new project before interest and income tax expenses Less: Interest expense Project Income before income tax Less: Income tax expense Project net income Net income with new project Earnings per share with new project:

Answer 1

E F Plan A: Issue S5,000,000 of Plan B: Issue 400,000 shares 1 Particulars 9% Bonds Payable of common stock Net income before new 2 project Expected Income on the new 3 project before 4,50,000 4,50,000 $ 9,00,000 9,00,000 Less: Interest Expenses 4 (5000000*9%) Projected income before income $ 4,50,000 4,50,000 $ 9,00,000 tax 6 Less: Income tax expense $ 90,000 $ 1,80,000 (450000*20%) (900000*20%) 7 8 Project net Income 9 Net income with new project 3,60,000 7,20,000 8,10,000 11,70,000 Earnings per share with new 10 project: 2.7 11 12 Plan A (810000/300000) 13 Plan B 1.67 (1170000/700,000) 14 15

F Plan A: Issue $5,000,000 of 9% | Plan B: Issue 400,000 shares of Bonds Payable 1 Particulars common stock |450000 450000 2 Net income before new project 900000 3 Expected Income on the new project before 900000 -5000000*9% 4 Less: Interest Expenses (5000000*9%) 900000 -900000*20% =+C3-C4 Projected income before income tax 5 -450000*20% 6 Less: Income tax expense (450000*20%) (900000*20%) 7 = E5-E6 =+F2+F8 =+C5-C6 =+D2+D8 8 Project net Income 9 Net income with new project 10 Earnings per share with new project: =+D9/300000 11 (810000/300000) 12 Plan A 1.67 13 Plan B (1170000/700,000) 14 15