Brief Exercise 10-15 Moby Inc. is considering two alternatives to finance its co

Question

Brief Exercise 10-15 Moby Inc. is considering two alternatives to finance its construction of a new $3 million plant. (a) Issuance of 300,000 shares of common stock at the market price of $10 per share. (b) Issuance of $3 million, 7% bonds at face value Complete the following table. (Round earnings per share to 2 decimal places, e.g. 0.25.) Issue Stock Issue Bond Income before interest and taxes Interest expense from bonds Income before income taxes Income tax expense (30%) Net income $785,000 485,000 Outstanding shares Earnings per share Indicate which alternative is preferable. Net income is if stock is used. However, earnings per share is than earnings per share if bonds are used because of the additional shares of stock that are outstanding.

Explanation / Answer

Calculate earning per share :

Issue bonds should be preferrable :

Net income is same is stock is used. However earning per share is lower than earning per share if bonds are used because of the additional share of stock that are outstanding

Issue stock Issue bond Income before interest and tax 785000 785000 Interest expense from bonds 0 -210000 Income before income taxes 785000 575000 Income tax expense -235500 -172500 Net income 549500 402500 Outstanding shares 785000 485000 Earning per share 0.70 0.83

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