Question
The board of directors of Finley Corporation is considering two plans for financing the purchase of new plant equipment. Plan #1 would require the issue
The board of directors of Finley Corporation is considering two plans for financing the purchase of new plant equipment. Plan #1 would require the issue of $4,000,000, 6%, 20-year bonds at face value. Plan #2 would require the issue of 200,000 common shares for $20 per share. Finley Corporation currently has 100,000 common shares issued at a book value of $20 each and retained earnings of $750,000. The income tax rate is expected to be 30%. Assume that income before interest and income taxes is expected to be $800,000 if the new factory equipment is purchased.
- Prepareaschedulewhichshowstheexpectednetincomeaftertaxes,earningspershare,andreturnonequityundereachoftheplansthattheboardofdirectorsisconsidering.
- Iftheboardofdirectorsstatedgoalistomaximizethecommonshareholdersreturn,whichalternativeispreferable?Iftheboardsstatedgoalistomaximizesolvency,whichalternativeispreferable?
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