Assume bonds payable are amortized using the straight-line amortization method unless stated otherwise. 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 a net income of $350,000 and 300,000 shares of common stock outstanding. Management believes the company can use the new funds to earn an 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 12-6 as a guide.
Assume bonds payable are amortized using the
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 a net income of $350,000 and 300,000 shares of common stock outstanding. Management believes the company can use the new funds to earn an 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 12-6 as a guide.
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