The board of directors of Pharoah Health Supply Corporation is considering two plans for financing the purchase of new plant equipment. Plan #1 would require the issuance of $3,000,000, 7%, 20-year bonds at face value. Plan #2 wouldrequire the issuance of 100,000 shares of $5 par value common stock that is selling for $30 per share on the open market. Pharoah currently has 100,000 shares of common stock outstanding and the income tax rate is expected to be 30%.Assume that income before interest and income taxes is expected to be $570,000 if the new factory equipment is purchased.Prepare a schedule that shows the expected net income after taxes and the earnings per share on common stock under each of the plans that the board of directors is considering. (Round earnings per share to 2 decimal places, e.g. 5.25.)Plan #1Issue Bonds$$Plan #2Issue Stock

When the net income realized by the company after accounting for preferred dividends is divided by…

Answered: The board of directors of Pharoah…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Before any new financing, Sammy Ltd. has net income of $250,000 and 200,000 common shares outstanding. Ms. Sammy owns 65% of the shares and therefore has control of the company. Sam is considering two plans for raising $700,000 for expansion. Plan A: Borrow at 5% of capital obtained. Plan B: issue 50,000 common shares at $14 each. Management believes the expansion will generate additional income of $300,000 before interest and taxes. Ltd.’s income tax rate is 25%. Ms. Sammy plans to sell to Jayco Co, her best friend’s company, to raise capital if equity is used. These two have been in business for over 15 years, selling fashion accessories. Required: Analyze the above plans to determine which one will result in a higher net income; show calculations for costs included. Also indicate which is more favorable. Using the calculations done above in part 1, indicate which option is more favorable after calculating Earnings Per Share. Which plan do you think would/should be choosen?…
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