(Learning Objective 4: Computing earnings-per-share effects of fi nancing with bonds versus shares) Speedtown Marina needs to...
Question:
(Learning Objective 4: Computing earnings-per-share effects of fi nancing with bonds versus shares) Speedtown Marina needs to raise $3 million to expand the company. Speedtown Marina is considering the issuance of either:
■ $3,000,000 of 8% bonds payable to borrow the money, or
■ 100,000 shares of share capital at $30 per share.
Before any new fi nancing, 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 fi nancing plan would you recommend for Speedtown Marina?
Step by Step Answer:
Financial Accounting International Financial Reporting Standards
ISBN: 9780273777809
1st Global Edition
Authors: Walter T Harrison, Charles Horngren, Bill Thomas, Themin Suwardy