On December 31, 2022, the equity accounts of Book Creations, Inc., contained the following balances:

Common stock ($10 par, 100,000 shares authorized) 50,000 shares issued and outstanding	$500,000
Retained earnings	$500,000

For the year 2022, the corporation had net income before income taxes of $200,000, income taxes of $42,000, and net income after taxes of $158,000. The corporation’s tax rate is 21 percent.


An expansion of the existing plant at a cost of $500,000 is planned. The corporation’s president, who owns 60 percent of the corporation’s common stock, estimates that the expansion would result in an increased net income of approximately $200,000 before interest and taxes. The financial vice president forecasts that the increase would be only $100,000.

Management is considering two possibilities for financing:

1. Issuance of 40,000 additional shares of common stock for $15 per share.
2. Issuance of $500,000 face amount, 10-year, 6 percent bonds payable, secured by a mortgage lien on the plant.

Assume that profits from existing operations will remain the same.


Required:

1. Assume that the president’s estimate of net income from the new plant is correct. Complete the following two-column table for each plan.
2. Assuming the financial vice president’s estimate of earnings is correct, complete the following two-column table for each plan.

(For all the requirements, round all calculations to the nearest dollar.)

Analyze:
Assume the company issued 40,000 shares of common stock and net income before taxes was $350,000. Would shareholders have realized an increase or decrease in earnings per share over fiscal 2022?

Complete this question by entering your answers in the tabs below.

• Analyze

Required 1

Assume that the president’s estimate of net income from the new plant is correct. Complete the following two-column table for each plan.

	Issuing Common Stock			Issuing Bonds
a. Net income before interest and taxes
b. Total bond interest
Taxable income
c. Total income tax
d. Total income after tax
e. Present income after tax
f. Increase / Decrease in net income
g. Present EPS		=	0		=	0
h. Proposed EPS		=	0		=	0

• Required 2

Assuming the financial vice president’s estimate of earnings is correct, complete the following two-column table for each plan.

	Issuing Common Stock			Issuing Bonds
a. Net income before interest and taxes
b. Total bond interest
Taxable income
c. Total income tax
d. Total income after tax
e. Present income after tax
f. Increase / Decrease in net income
g. Present EPS		=	0		=	0
h. Proposed EPS		=	0		=	0