MC Electronics is considering two plans for raising \(\$ 1,000,000\) to expand operations. Plan A is to issue \(9 \%\) bonds payable, and plan B is to issue 100,000 shares of common stock. Before any new financing, MC has net income of \(\$ 300,000\) and 100,000 shares of common stock outstanding. Management believes the company can use the new funds to earn additional income of \(\$ 420,000\) before interest and taxes. The income tax rate is \(40 \%\).

Requirement 

Analyze MC Electronics' situation to determine which plan will result in higher earnings per share. Use Exhibit 15-4 as a guide.

Exhibit 15-4 

Net income before new project Expected income on the new project before interest and income tax expenses Less: Interest expense ($500,000 x 0.10) Project income before income tax Less: Income tax expense (40%) Project net income Net income with new project Earnings per share with new project: Plan I ($390,000/100,000 shares) Plan 2 ($420,000/150,000 shares) Plan 1 Issue $500,000 of 10% Bonds Payable $200,000 (50,000) 150,000 (60,000) $300,000 Plan 2 Issue $500,000 of Common Stock $300,000 $200,000 200,000 (80,000) 90,000 120,000 $390,000 $420,000 $3.90 $2.80