Chapter 10, Problem 10.53BE

(Learning Objective 5: Analyze alternative plans for raising money) Bondwell Financial Services is considering two plans for raising $500,000 to expand operations. Plan A is to borrow at 6%, and plan B is to issue 100, 000 shares of common stock at $5.00 per share. Before any new financing, Bondwell has net income of $200,000 and 100,000 shares of common stock outstanding. Assume you own most of Bondwell’s existing stock. Management believes the company can use the new funds to earn additional income of $400,000 before interest and taxes. Bondwell’s income tax rate is 30%.

Requirements

1. Analyze Bondwell’s situation to determine which plan will result in the higher earnings per share.

2. Which plan allows you to retain control of the company? Which plan creates more financial risk for the company? Which plan do you prefer? Why?