(L.OBJ. 8) Analyzing alternative plans to raise money [15—20 min]
SG Electronics is considering two plans for raising $3,000,000 to expand operations. Plan A is to issue 6% bonds payable, and plan B is to issue 100,000 shares of common stock. Before any new financing, SG has net income of $300,000 and 200,000 shares of common stock outstanding. Management believes the company can use the new funds to earn additional income of $500,000 before interest and taxes. The income tax rate is 40%.
Requirement
1. Analyze SG Electronics’ situation to determine which plan will result in higher earnings per share. Use Exhibit 10-10 as a guide.
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