T&T Marina needs to raise $2 million to expand. T&T's president is considering two plans:
• Plan A: Issue $2,000,000 of 16 percent bonds payable to borrow the money
• Plan B: Issue 100,000 common shares at $20.00 per share
Before any new financing, T&T expects to earn net income of $600,000, and the company already has 200,000 common shares outstanding. T&T believes the expansion will increase income before interest and income tax by $400,000. The income tax rate is 35 percent.
Prepare an analysis similar to Exhibit 15-8 to determine which plan is likely to result in higher earnings per share. Which financing plan would you recommend?