JN 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, JN 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 JN 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
JN 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, JN 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 JN 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
Chapter14: Capital Structure Management In Practice
Section: Chapter Questions
Problem 20P
Related questions
Question
JN
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,
JN
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
JN
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.
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Plan A: Issue $1,000,000
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of 10% Bonds Payable
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Net income before new project
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Expected income on the new project before
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interest and income tax expenses
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Less: Interest expense
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Project income before income tax
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Less: Income tax expense
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Project net income
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Net income with new project
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Earnings per share with new project:
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Plan A
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Plan B
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