lec encs is soenng two pars t rrasing $1 000 00 espans at rsPan Aistowse 7% bord

Question

lec encs is soenng two pars t rrasing $1 000 00 espans at rsPan Aistowse 7% bords payable and Bistoissue 100.0 Osaes or common stock Betre a ynetna er -NE erres has ne no $150. o oard 500 000 shares of commen steck out ta drg Management beieves to comp any can use the ne ha ds to earn a sb nal income of S30 ,00 betrerte est andtam The income tar rat" 20% Analyze the JN Electrics station to dete.ne which plan w. resa n higher eamngs per share (Complete 01 anseer beses Erter for any zero baaren Round earnings per shae sorts to the nearest cert Plan A: hsue $1,000,000 of 7% Bonds Payable Net income betore new project Expected iIncome on the new project before Interest and income tax expenes Less Interest expense Project income before income ta Less Income tax expense Project net ncome Ner income with new project Earnings pershae h projt Pian A Enter any number in the edit felds and then click Check Answer

Explanation / Answer

Plan 1 raising $ 1,000,000 issuing bond of 7% Plan 2 raising $ 1,000,000 by issuing 100,000 of common stock Net Income Before Project $150,000   $150,000 Expected Income from New Project $300,000 $300,000 Less: Interest Expenses (1,000,000x0.07) $70,000     - NEt Income Before Taxes $230,000 $300,000 Less : Taxes @ 20% $46,000 $60,000 Income After Taxes $184,000 $240,000 Net Income From New Project $334,000 $390,000 Earnings per share with new Project Plan 1(334,000/500,000) $0.67 Plan 2(390,000/600,000) $0.65 Therefore, Plan 1 has higher EPS and thus Plan 1 is better.

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