S9-13. (Learning Objective 4: Computing earnings-per-share effects of financing with bonds versus shares) Speedtown Marina needs to raise $3.5 million to expand the company. Speedtown Marina is considering the issuance of either:

■ $3,500,000 of 8% bonds payable to borrow the money, or

■ 100,000 shares of share capital at $35 per share.

Before any new financing, Speedtown Marina expects to earn net income of $300,000, and the company already has 100,000 shares of share capital outstanding. Speedtown Marina believes the expansion will increase income before interest and income tax by $500,000. The income tax rate is 35%.

Prepare an analysis to determine which plan is likely to result in the higher earnings per share. Based solely on the earnings-per-share comparison, which financing plan would you recommend for Speedtown Marina?