Walter’s Surf Shop is considering two plans for raising \($2,500,000\) to expand operations. Plan A is to issue 6% bonds payable, and plan B is to issue 100,000 shares of common stock. Before any new financing, Walter’s has net income of \($350,000\) and 25,000 shares of common stock outstanding. Management believes the company can use the new funds to earn additional income of \($950,000\) before interest and taxes. The income tax rate is 33%.
Requirement
1. Analyze Walter’s situation to determine which plan will result in higher earnings per share.