Ashcroft Corp., a family-controlled business, is considering raising additional funds to modernize its factory. The plan is expected to cost $2.34 million and will increase annual earnings before interest and taxes starting January 1, 2011, by $0.6 million. A summarized balance sheet and income statement are shown below. Currently, the share price is $2.00.

Two plans have been suggested. First, 1.3 million shares could be issued at $1.80 (net of issue costs). Second, a consortium of six local companies has offered to buy bonds from the business totalling $2.34 million. Interest would be at the rate of 13% per annum and capital repayments of equal annual installments of $234,000 starting on January 1, 2012, would be required. Assume a tax rate of 50%.
Required:
(a) Compute the earnings per share for 2011 under the bond and the common share alternatives.
(b) Compute the level of profits before bond interest and tax at which the earnings per share under the two plans will be equal.
(c) Discuss the considerations the directors should take into account before deciding upon bond financing or common share financing.

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Ashcroft Corp Balance Sheet as at December 31, 2010 (in $ thousands) Current assets Accounts receivable Inventory Total current assets Property, plant, and equipment (net) Total assets Current liabilities Accounts payable Income taxes payable Total current liabilities Total liabilities Shareholders' equity Common shares (4,000 outstanding) Retained earnings Total shareholders equity Total liabilities and shareholders' equity 2.2 2.4 4.6 1.4 6.0 3.2 0.3 3.5 3.5 I.0 1.5 2.5 6.0 Ashcroft Corp Income Statement and Addition to Retained Earnings for the year ended December 31, 2010 Sales revenue Earnings before tax ax expense Net income Less: Dividends paid Additions to retained earnings for the financial year S millions) 11.2 1.2 0.6 0.6 0.3 0.3