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Answer-
SHAMROCK INC. | |||
Effect on net income $ earnings per share | |||
Particulars | Plan A | Plan B | |
Issue Stock | Issue Bonds | ||
$ | $ | ||
Income before interest & taxes | 1595000 | 1595000 | |
Less:- Interest on bonds | $1650000*6% | 0 | 99000 |
Income before taxes | 1595000 | 1496000 | |
Income Taxes 40% | $1595000*40%=$638000 | $1496000*40% =$598400 | |
Income after taxes(A) | 957000 | 897600 | |
No of shares (B) | 660000 Shares+165000 Shares (New issue)=825000 | 660000 | |
Earning per share C=A/B | 1.16 | 1.36 |
Issuance of bonds would be preferable due to higher earning per share compare with the issue of shares.
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