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.
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.
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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