Carla Vista Inc. is considering two alternatives to finance its construction of a new $1.40 million plant. (a) Issuance of 140,000 shares of common stock at the market price of $10 per share. (b) Issuance of $1,400,000, 7% bonds at face value. Complete the following table. (Round earnings per share to 2 decimal places, e.g. 0.25.) Income before interest and taxes Interest expense from bonds Income before income taxes Income tax expense (40%) Net income Outstanding shares Earnings per share $ tA tA $ Indicate which alternative is preferable. Issue Stock $600,000 $ +A Net income is because of the additional shares of stock that are outstanding. $ LA if stock is used. However, earnings per share is Issue Bond $600,000 460,000 than earnings per share if bon
Carla Vista Inc. is considering two alternatives to finance its construction of a new $1.40 million plant. (a) Issuance of 140,000 shares of common stock at the market price of $10 per share. (b) Issuance of $1,400,000, 7% bonds at face value. Complete the following table. (Round earnings per share to 2 decimal places, e.g. 0.25.) Income before interest and taxes Interest expense from bonds Income before income taxes Income tax expense (40%) Net income Outstanding shares Earnings per share $ tA tA $ Indicate which alternative is preferable. Issue Stock $600,000 $ +A Net income is because of the additional shares of stock that are outstanding. $ LA if stock is used. However, earnings per share is Issue Bond $600,000 460,000 than earnings per share if bon
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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![**Carla Vista Inc. Financing Alternatives**
Carla Vista Inc. is evaluating two options to finance the construction of a new $1.40 million plant:
1. **Issuance of Stock**:
- Issue 140,000 shares of common stock at $10 per share.
2. **Issuance of Bonds**:
- Issue $1,400,000 in 7% bonds at face value.
**Table for Evaluation**:
Complete the table below. *Note: Round earnings per share to two decimal places (e.g., 0.25).*
| | Issue Stock | Issue Bond |
|-------------------------------|-------------|------------|
| **Income before interest and taxes** | $600,000 | $600,000 |
| **Interest expense from bonds** | | |
| **Income before income taxes** | | |
| **Income tax expense (40%)** | | |
| **Net income** | $ | $ |
| **Outstanding shares** | | 460,000 |
| **Earnings per share** | $ | $ |
**Decision Guide**:
- **Indicate the preferable alternative**:
- Net income is [ higher/lower ] if stock is used.
- However, earnings per share is [ higher/lower ] than earnings per share if bonds are used.
Through completing the table, evaluate which financing method benefits Carla Vista Inc. with respect to net income and earnings per share, influencing the decision-making process for optimal financial strategy.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fe30699be-2882-4a27-acce-afcc593a9b43%2Fe74b95ba-2cfc-4bf2-a1fe-42963218c7a5%2Fvzj2hxg_processed.png&w=3840&q=75)
Transcribed Image Text:**Carla Vista Inc. Financing Alternatives**
Carla Vista Inc. is evaluating two options to finance the construction of a new $1.40 million plant:
1. **Issuance of Stock**:
- Issue 140,000 shares of common stock at $10 per share.
2. **Issuance of Bonds**:
- Issue $1,400,000 in 7% bonds at face value.
**Table for Evaluation**:
Complete the table below. *Note: Round earnings per share to two decimal places (e.g., 0.25).*
| | Issue Stock | Issue Bond |
|-------------------------------|-------------|------------|
| **Income before interest and taxes** | $600,000 | $600,000 |
| **Interest expense from bonds** | | |
| **Income before income taxes** | | |
| **Income tax expense (40%)** | | |
| **Net income** | $ | $ |
| **Outstanding shares** | | 460,000 |
| **Earnings per share** | $ | $ |
**Decision Guide**:
- **Indicate the preferable alternative**:
- Net income is [ higher/lower ] if stock is used.
- However, earnings per share is [ higher/lower ] than earnings per share if bonds are used.
Through completing the table, evaluate which financing method benefits Carla Vista Inc. with respect to net income and earnings per share, influencing the decision-making process for optimal financial strategy.
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