BE15 BMoby Ine. is considering two alternatives to finance its comtructiom of 45

Question

BE15 BMoby Ine. is considering two alternatives to finance its comtructiom of 45 00e $2 million plant. a) Iss b) Issuance of $2 million, 8% bonds at face value. uance of 200,000 shares of common on stock at the market price of $10 per share t omplete the following table, and indicate which alternative is preferable. Issue Stock $700,000 Issue Bond $700,000 Income before interest and taxes Interest expense from bonds Income before income taxes Income tax expense (30%) Net income Outstanding shares 500,000 Earnings per share

Explanation / Answer

Issue stock Issue BONDS Income before interest and taxes 700,000 700,000 Interest expense - (2,000,000*8%)=160,000 Income before taxes 700,000 540,000 Income tax expense(30%) 210,000 162000 Net income 490,000 378000 Outstanding shares (500,000+200,000)=700,000 500,000 EPS (490,000/700,000)=$0.7 (378000/500,000)=$0.756

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