Moby Inc. 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, 8% 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 $700,000 $700,000 Interest expense from bonds Income before income taxes Income tax expense (30%) Net income Outstanding shares 500,000 Earnings per share Indicate which alternative is preferable. Net income is * if stock is used. However, earnings per share is + than earnings per share if bonds are used because of the additional shares of stock that are outstanding.

Moby Inc. 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, 8% 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 $700,000 $700,000 Interest expense from bonds Income before income taxes Income tax expense (30%) Net income Outstanding shares 500,000 Earnings per share Indicate which alternative is preferable. Net income is * if stock is used. However, earnings per share is + than earnings per share if bonds are used because of the additional shares of stock that are outstanding.

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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Question

Moby Inc. 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, 8% bonds at face value.

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