Cheyenne Corp. is considering two alternatives to finance its construction of a new $2 million plant.(a) Issuance of 200,000 shares of common stock at the market price of $10 per share.(b) Issuance of $2 million, 7% bonds at face value.Complete the following table. (Round earnings per share to 2 decimal places, e.g. 0.25.) Issue Stock Issue BondIncome before interest and taxes $735,000 $735,000Interest expense from bonds Income before income taxes Income tax expense (25%) Net income $ $ Outstanding shares 535,000Earnings per share $ $ Indicate which alternative is preferable.Net income is lowerhigher if stock is used. However, earnings per share is lowerhigher than earnings per share if bonds are used because of the additional shares of stock that are outstanding.

Bonds are considered a financial instrument used to raise finance for the organization. It is also considered as a cheaper source of finance. It is because the interest generated on bonds is a tax saving item.So. Issue of bonds is the best alternative.

Answered: Cheyenne Corp. is considering two…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Cheyenne Corp. is considering two alternatives to finance its construction of a new $2 million plant.

(a)		Issuance of 200,000 shares of common stock at the market price of $10 per share.
(b)		Issuance of $2 million, 7% bonds at face value.

Complete the following table. (Round earnings per share to 2 decimal places, e.g. 0.25.)

	Issue Stock	Issue Bond
Income before interest and taxes	$735,000	$735,000
Interest expense from bonds
Income before income taxes
Income tax expense (25%)
Net income	$	$

Outstanding shares		535,000
Earnings per share	$	$

Indicate which alternative is preferable.

Net income is lowerhigher if stock is used. However, earnings per share is lowerhigher than earnings per share if bonds are used because of the additional shares of stock that are outstanding.

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