Martin Corporation is considering two alternatives to finance its purchase of a

Question

Martin Corporation is considering two alternatives to finance its purchase of a new $4,000,000 office building.

(a) Issue 400,000 shares of common stock at $10 per share.

(b) Issue 7%, 10-year bonds at par ($4,000,000).

Income before interest and taxes is expected to be $3,500,000. The company has a 30% tax rate and has 600,000 shares of common stock outstanding prior to the new financing.

Instructions

Calculate each of the following for each alternative:

(1) Net income.

(2) Earnings per share.

Please provide full details Gracias....

Explanation / Answer

(a) Issue 400,000 shares of common stock at $10 per share.

TOTAL NO OF SHARES OUTSTANDING = 600000 + 400000

= 1000000 SHARES.

PAT = EBIT(1-t)

PAT OR NET INCOME = 3500000*0.7

=2450000

EPS = PAT/TOTAL NO OF SHARES OUTSTANDING

=2450000/1000000

=2.45 PER SHARE

(b) Issue 7%, 10-year bonds at par ($4,000,000).

TOTAL NO OF SHARES OUTSTANDING = 600000

PAT = (EBIT - INTEREST)(1-t)

PAT = (3500000- 7%OF4000000)*0.7

PAT = 3220000*0.7

PAT OR NET INCOME = 2254000

EPS = 2254000/600000

= 3.756 PER SHARE

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