JNElectronics is considering two plans for raising$1,000,000to expand operations. Plan A is to issue10%bonds payable, and plan B is to issue200,000shares of common stock. Before any new financing,JNElectronics has net income of$400,000and300,000shares of common stock outstanding. Management believes the company can use the new funds to earn additional income of$800,000before interest and taxes. The income tax rate is21%.Analyze theJNElectronics situation to determine which plan will result in higher earnings per share.Begin by completing the analysis below for plan A, then plan B. Plan A: Issue $1,000,000 of 10% Bonds PayableNet income before new project Expected income on the new project before interest and income tax expenses Less: Interest expense Project income before income tax Less: Income tax expense Project net income Net income with new project Earnings per share with new project: Plan A Plan B

Net income: It is the income earned after deducting all the expenses incurred whether they are…

Answered: JN Electronics is considering two plans…

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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Question

Electronics is considering two plans for raising

$1,000,000

to expand operations. Plan A is to issue

10%

bonds payable, and plan B is to issue

200,000

shares of common stock. Before any new financing,

Electronics has net income of

$400,000

and

300,000

shares of common stock outstanding. Management believes the company can use the new funds to earn additional income of

$800,000

before interest and taxes. The income tax rate is

21%.

Analyze the

Electronics situation to determine which plan will result in higher earnings per share.

Begin by completing the analysis below for plan A, then plan B.

	Plan A: Issue $1,000,000
	of 10% Bonds Payable
Net income before new project
Expected income on the new project before
interest and income tax expenses
Less: Interest expense
Project income before income tax
Less: Income tax expense
Project net income
Net income with new project
Earnings per share with new project:
Plan A
Plan B

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