Chapter 14, Problem E14.19E

Analyzing alternative plans to raise money

AF Electronics is considering two plans for raising $3,000,000 to expand operations. Plan A is to issue 7% bonds payable, and plan B is to issue 100,000 shares of common stock. Before any new financing, AF has net income of $250,000 and 200,000 shares of common stock outstanding. Management believes the company can use the new funds to earn additional income of $500,000 before interest and taxes. The income tax rate is 30%. Analyze the AF Electronic situation to determine which plan will result in higher earnings per share. Use Exhibit 14−6 as a guide.