Question
CornwallCorporationhastwoalternativesforraisingmoneyfromfinancing:Plan1Plan2Issue10%bondsatfacevalue:$2,000,000IssueCommonStock,$10par$3,000,000$1,000,000$3,000,000$3,000,000TotalFinancingEarningsbeforeinterestandincometax$750,000$750,00025.00%RateofReturnonFinancingIncomeTaxRate=20%SharesIssued300,000100,000sharesPlan1Plan2EARNINGSBEFOREINTERESTANDTAXES$750,000$750,000DEDUCTBONDINTERESTINCOMEBEFOREINCOMETAXINCOMETAXNETINCOMESHARESOFCOMMONSTOCKOUTSTANDINGsharesEARNINGSPERSHAREIftherateofreturnonFinancing>BondInterestRate,theborrowingisadvantageous.(FavorableFinancialLeverage)IftherateofreturnonFinancing
CornwallCorporationhastwoalternativesforraisingmoneyfromfinancing:Plan1Plan2Issue10%bondsatfacevalue:$2,000,000IssueCommonStock,$10par$3,000,000$1,000,000$3,000,000$3,000,000TotalFinancingEarningsbeforeinterestandincometax$750,000$750,00025.00%RateofReturnonFinancingIncomeTaxRate=20%SharesIssued300,000100,000sharesPlan1Plan2EARNINGSBEFOREINTERESTANDTAXES$750,000$750,000DEDUCTBONDINTERESTINCOMEBEFOREINCOMETAXINCOMETAXNETINCOMESHARESOFCOMMONSTOCKOUTSTANDINGsharesEARNINGSPERSHAREIftherateofreturnonFinancing>BondInterestRate,theborrowingisadvantageous.(FavorableFinancialLeverage)IftherateofreturnonFinancing
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access with AI-Powered Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started