Barnes Company is considering two alternatives to finance its purchase of a new

Question

Barnes Company 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

Explanation / Answer

shares Bond EBIT                  3,500,000.00      3,500,000.00 Less: Int                                        -           280,000.00 PBT                  3,500,000.00      3,220,000.00 Tax                  1,050,000.00         966,000.00 Net income                  2,450,000.00      2,254,000.00 NO of shares                  1,000,000.00         600,000.00 EPS                                   2.45                      3.76

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