(The two little drop down menus in the last question right above^^ say \"lower\"

Question

(The two little drop down menus in the last question right above^^ say "lower" and "higher")

Moby Inc. is considering two alternatives to finance its construction of a new S2 million plant. Issuance of 200,000 shares of common stock at the market price of S10 per share. Issuance of 52 million, 7% bonds at face value. Complete the following table. (Round earnings per share to 2 decimal places, e.g. 0.25.) Indicate which alternative is preferable. Net income is if stock is used. However, earnings per share is than earnings per share if bonds are used because of the ac shares of stock that are outstanding.

Explanation / Answer

Net income is = 517500

EPS lower

Issue stock Issue bond Income before interest and taxes 690000 690000 Less:Interest   [2,000,000*.07] -140,000 Income before tax 690000 550000 Less:Tax [.25* Income before tax ] 172500 137500    [690000*.25] Net income 517500 412500 Number of shares 2490000 490000 EPS .21 .84

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