Question
Speedtown Marina needs to raise $3 million to expand the company.Speedtown Marina is considering the issuance of either:$3,000,000 of 8% bonds payable to borrow the
Speedtown Marina needs to raise $3 million to expand the company.Speedtown Marina is considering the issuance of either:$3,000,000 of 8% bonds payable to borrow the money, or100,000 shares of common stock at $30 per share.Before any new financing, Speedtown Marina expects to earn net income of $300,000, and the company already has 100,000 shares of common stock outstanding. Speedtown Marina believes the expansion will increase income before interest and income tax by $500,000. The income tax rate is 35%.Prepare an analysis to determine which plan is likely to result in the higher earnings per share. Based solely on the earnings-per-share comparison, which financing plan would you recommend for Speedtown Marina?View Solution:
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