Brief Exercise 11-11 Kingbird, Inc.currently has 710,000 shares of common stock

Question

Brief Exercise 11-11 Kingbird, Inc.currently has 710,000 shares of common stock outstanding. Kingbird, Inc. is considering these two alternatives to finance its construction of a new $1.65 milion plant: Issuance of 165,000 shares of common stock at the market price of $10 per share. Issuance of $1.65 million, 6% bonds at face value. 1. 2. Complete the table. (Round earnings per share to 2 decimal places, e.g. $2.66. Issue Stock Issue Bonds Income before interest and taxes Interest expense from bonds Income before income taxes Income tax expense (30%) Net income $1,610,000 $1,610,000 Outstanding shares 710,000 Earnings per share

Explanation / Answer

(In $)

Issue Stocks

Issue Bonds

Income before interest and tax

1,610,000

1,610,000

Interest expense

-

99,000

(1,650,000*6%)

Income before taxes

1,610,000

1,511,000

Income tax (30%)

483,000

453,300

Net Income

1,127,000

1,057,700

Outstanding Shares

875,000

(710,000+165,000)

710,000 shares

Earnings per share

$1.288

$1.49

Earnings per share = Net income / No. of outstanding shares

Issue Stocks

Issue Bonds

Income before interest and tax

1,610,000

1,610,000

Interest expense

-

99,000

(1,650,000*6%)

Income before taxes

1,610,000

1,511,000

Income tax (30%)

483,000

453,300

Net Income

1,127,000

1,057,700

Outstanding Shares

875,000

(710,000+165,000)

710,000 shares

Earnings per share

$1.288

$1.49

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