(L.OBJ. 8) Compare Issuing bonds to issuing stock [10—15 min]
Speegleville Marina needs to raise $1 million to expand. Speegleville’s president is considering two plans:
• Plan A: Issue $2,000,000 of 8% bonds payable to borrow the money
• Plan P: Issue 100,000 shares of common stock at $20 per share
Before any new financing, the company expects to earn net income of $500,000, and the company already has 100,000 shares of common stock outstanding. Speegleville believes the expansion will increase income before interest and income tax by $200,000. The income tax rate is 40%.
Requirement
1. Prepare an analysis similar to Exhibit 10-10 to determine which plan is likely to result in higher earnings per share. Which financing plan would you recommend?
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