Brief Exercise 11-11 Issue Stock Issue Bonds Income before interest and taxes In

Question

Brief Exercise 11-11

Issue Stock

Issue Bonds

Income before interest and taxes

Interest expense from bonds

Income before income taxes

Income tax expense (30%)

Net income

Outstanding shares

770,000

Earnings per share

Brief Exercise 11-11

Skysong, Inc. currently has 770,000 shares of common stock outstanding. Skysong, Inc. is considering these two alternatives to finance its construction of a new $1.95 milion plant:
1. Issuance of 195,000 shares of common stock at the market price of $10 per share. 2. Issuance of $1.95 million, 8% bonds at face value.

Explanation / Answer

Complete the table :

Issue stock Issue bonds Income before interest tax 1670000 1670000 Less: interest (156000) Income before tax 1670000 1514000 Less: Income tax (501000) (454200) Net income 1169000 1059800 Shares outstanding 965000 770000 Earning per share 1.21 1.38

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