Cheyenne Corp. is considering two alternatives to finance its construction of a new $2 million plant. (a) Issuance of 200,000 shares of common stock at the market price of $10 per share. (b) Issuance of $2 million, 7% bonds at face value. Complete the following table. (Round earnings per share to 2 decimal places, e.g. 0.25.) Issue Stock Issue Bond Income before interest and taxes $735,000 $735,000 Interest expense from bonds Income before income taxes Income tax expense (25%) Net income $ $ Outstanding shares 535,000 Earnings per share $ $ Indicate which alternative is preferable. Net income is lowerhigher if stock is used. However, earnings per share is lowerhigher than earnings per share if bonds are used because of the additional shares of stock that are outstanding.
Cheyenne Corp. is considering two alternatives to finance its construction of a new $2 million plant. (a) Issuance of 200,000 shares of common stock at the market price of $10 per share. (b) Issuance of $2 million, 7% bonds at face value. Complete the following table. (Round earnings per share to 2 decimal places, e.g. 0.25.) Issue Stock Issue Bond Income before interest and taxes $735,000 $735,000 Interest expense from bonds Income before income taxes Income tax expense (25%) Net income $ $ Outstanding shares 535,000 Earnings per share $ $ Indicate which alternative is preferable. Net income is lowerhigher if stock is used. However, earnings per share is lowerhigher than earnings per share if bonds are used because of the additional shares of stock that are outstanding.
Excel Applications for Accounting Principles
4th Edition
ISBN:9781111581565
Author:Gaylord N. Smith
Publisher:Gaylord N. Smith
ChapterMB: Model-building Problems
Section: Chapter Questions
Problem 8M
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Cheyenne Corp. is considering two alternatives to finance its construction of a new $2 million plant.
| (a) | Issuance of 200,000 shares of common stock at the market price of $10 per share. | |
| (b) | Issuance of $2 million, 7% bonds at face value. |
Complete the following table. (Round earnings per share to 2 decimal places, e.g. 0.25.)
|
Issue Stock
|
Issue Bond
|
|||
| Income before interest and taxes |
$735,000
|
$735,000
|
||
| Interest expense from bonds |
|
|
||
| Income before income taxes |
|
|
||
| Income tax expense (25%) |
|
|
||
| Net income |
$
|
$
|
||
| Outstanding shares |
|
535,000
|
||
| Earnings per share |
$
|
$
|
Indicate which alternative is preferable.
Net income is lowerhigher if stock is used. However, earnings per share is lowerhigher than earnings per share if bonds are used because of the additional shares of stock that are outstanding.
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