4. The board of directors of Franks Corporation are considering two plans for fi

Question

4. The board of directors of Franks Corporation are considering two
plans for financing the purchase of new plant equipment. Plan #1
would require the issuance of $4,000,000, 9%, 20-year bonds at face
value. Plan #2 would require the issuance of 200,000 shares of $5
par value common stock which is selling for $20 per share on the
open market. Franks Corporation currently has 100,000 shares of
common stock outstanding and the income tax rate is expected to be
30%. Assume that income before interest and income taxes is
expected to be $900,000 if the new factory equipment is purchased.

INSTRUCTIONS
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.

Explanation / Answer

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