You hold a 25% common stock interest in YouOwnlt, a family-owned construction eq

Question

You hold a 25% common stock interest in YouOwnlt, a family-owned construction equip- ment company. Your sister, who is the manager, has proposed an expansion of plant facilities at an expected cost of $26,000,000. Two alternative plans have been suggested as methods of financing the expansion. Each plan is briefly described as follows: Plan 1- Plan 2. Issue $26,000,000 of 20-year, 8% notes at face amount Issue an additional 550,000 shares of $10 par common stock at $20 per share and $15,000,000 of 20-year, 8% notes at face amount (Continued) ght 2018 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. WCN 02-200-208 Copyrighbe Long-Term Liabilities: Bonds and Notes The balance sheet as of the end of the previous fiscal year is as follows: YouOwnit, Inc. Balance Sheet December 31, 20Y7 Assets Current assets Property, plant, and equipment Total assets $15,000,000 22,500,000 537,500,000 Common stock, $10 Paid-in capital in excess of par Retained earnings Total liabilities and stockholders' equity ?" $11,250,000 4,000,000 500,000 21,750,000 $37,500,000 Net income has remained relatively constant over the past several years. The expan sion program is expected to increase yearly income before bond interest and income tax from $2,667,000 in the previous year to $5,000,000 for this year. Your sister has asked you, as the company treasurer, to prepare an analysis of each financing plan 1. Prepare a table indicating the expected earnings per share on the common stock under each plan. Assume an income tax rate of 40%. Round to the nearest cent.

Explanation / Answer

Particulars Plan1 Plan2 Full debt debt plus Equity Income $                        50,00,000.00 $                        50,00,000.00 Less: Interset cost $                        20,80,000.00 $                        12,00,000.00 (26000000*8%) (15000000*8%) Earning after Interest $                        29,20,000.00 $                        38,00,000.00 Less Tax $                        11,68,000.00 $                        15,20,000.00 Earning after interest*40% Earning after interest*40% $                        17,52,000.00 $                        22,80,000.00 No of common Stock 400000 950000 EPS 4.38 2.4 Hence, Under plan 1 wealth can be maximized

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