The board of directors of Moore Corporation is considering two plans for financing the purchase of new plant equipment. Plan #1 would require the issuance of $5,000,000, 6%, 20-year bonds at face value. Plan #2 would require the issuance of 100,000 shares of $5 par value common stock which is selling for $40 per share on the open market. Moore Corporation currently has 100,000 shares of common stock outstanding and the income tax rate is expected to be 35%. Assume that income before interest and income taxes is expected to be $500,000 if the new factory equipment is purchased.
Prepare a schedule which shows the expected net income after taxes and the earnings per share on common stock under each of the plans that the board of directors is considering.
Slotkin Health is considering two alternatives for the financing of some high technology medical equipment. These two alternatives are:
1.Issue 60,000 shares of $10 par value common stock at $50 per share.
2.Issue $3,000,000, 8%, 10-year bonds at par.
It is estimated that the company will earn $900,000 before interest and taxes as a result of acquiring the medical equipment. The company has an estimated tax rate of 40% and has 80,000 shares of common stock outstanding prior to the new financing.
Determine the effect on net income and earnings per share for these two methods of financing.
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