You hold a \(25 \%\) common stock interest in the family-owned business, a vending machine company. Your sister, who is the manager, has proposed an expansion of plant facilities at an expected cost of \(\$ 5,000,000\). Two alternative plans have been suggested as methods of financing the expansion. Each plan is briefly described as follows:

Plan 1. Issue \(\$ 5,000,000\) of 20 -year, \(7 \%\) bonds at face amount.

Plan 2. Issue an additional 87,500 shares of \(\$ 5\) par common stock at \(\$ 20\) per share, and \(\$ 3,250,000\) of 20 -year, \(7 \%\) bonds at face amount. The balance sheet as of the end of the previous fiscal year is as follows:

Net income has remained relatively constant over the past several years. The expansion program is expected to increase yearly income before bond interest and income tax from \(\$ 500,000\) in the previous year to \(\$ 700,000\) for this year. Your sister has asked you, as the company treasurer, to prepare an analysis of each financing plan.
1. Prepare a table indicating the expected earnings per share on the common stock under each plan. Assume an income tax rate of \(40 \%\). Round to the nearest cent.
2.

a. Discuss the factors that should be considered in evaluating the two plans.

b. Which plan offers the greater benefit to the present stockholders? Give reasons for your opinion.objs. 2, 3

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Current assets. Property, plant, and equipment Total assets Liabilities Common stock, $5 Vendco, Inc. Balance Sheet December 31, 2008 Assets $2,350,000 5,150,000 $7,500,000 Liabilities and Stockholders' Equity $2,000,000 800,000 80,000 Paid-in capital in excess of par Retained earnings Total liabilities and stockholders' equity 4,620,000 $7,500,000