Speegleville Marina needs to raise \($2\) million to expand. Speegleville’s president is considering two plans:
• Plan A: Issue \($2,000,000\) of 8% bonds payable to borrow the money
• Plan B: Issue 100,000 shares of common stock at \($20\) per share
Before any new financing, the company expects to earn net income of \($500,000\), and the company already has 100,000 shares of common stock outstanding. Speegleville believes the expansion will increase income before interest and income tax by \($200,000\). The income tax rate is 40%.
Requirement
1. Prepare an analysis similar to Exhibit 10-10 to determine which plan is likely to result in higher earnings per share. Which financing plan would you recommend?