SB Electronics is considering two plans for raising $4,000,000 to expand operations. Plan A is to issue 9% bonds payable,and plan B is to issue 500,000 shares of common stock. Before any new financing, SB Electronics has net income of$350,000 and 300,000 shares of common stock outstanding. Management believes the company can use the new funds toearn additional income of $700,000 before interest and taxes. The income tax rate is 30%. Analyze the SB Electronicssituation to determine which plan will result in higher earnings per share. (Complete all answer boxes. Enter "0" for any zerobalances. Round earnings per share amounts to the nearest cent.)Begin by completing the analysis below for plan A, then plan B.Net income before new projectExpected income on the new project beforeinterest and income tax expensesLess: Interest expenseProject income before income taxLess: Income tax expenseProject net incomeNet income with new projectEarnings per share with new project:Plan APlan BPlan A: Issue $4,000,000of 9% Bonds Payable]]]

Earnings per share or EPS is an important financial measure, which indicates the profitability of a…

Answered: SB Electronics is considering two plans…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter3: Evaluation Of Financial Performance

Section: Chapter Questions

Problem 17P

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JN Electronics is considering two plans for raising $1,000,000 to expand operations. Plan A is to issue 10% bonds payable, and plan B is to issue 200,000 shares of common stock. Before any new financing, JN Electronics has net income of $400,000 and 300,000 shares of common stock outstanding. Management believes the company can use the new funds to earn additional income of $800,000 before interest and taxes. The income tax rate is 21%. Analyze the JN Electronics situation to determine which plan will result in higher earnings per share. Begin by completing the analysis below for plan A, then plan B. Plan A: Issue $1,000,000 of 10% Bonds Payable Net income before new project Expected income on the new project before interest and income tax expenses Less: Interest expense Project income before income tax Less: Income tax expense Project net income Net income with…
CL 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 400,000 shares of common stock. Before any new financing, CL Electronics has net income of $450,000 and 300,000 shares of common stock outstanding. Management believes the company can use the new funds to earn additional income of $900,000 before interest and taxes. The income tax rate is 21%. Analyze the CL Electronics situation to determine which plan will result in higher earnings per share. (Complete all answer boxes. Enter "0" for any zero balances. Round earnings per share amounts to the nearest cent.) Begin by completing the analysis below for plan A, then plan B. Net income before new project Expected income on the new project before interest and income tax expenses Less: Interest expense Project income before income tax Less: Income tax expense Project net income Net income with new project Earnings per share with new project: Plan A…
PQR Corporation is considering the following alternative plans of financing for raising$4,000,000: The following additional information is available for PQR Corporation: Earnings before bond interest and income taxes (EBIT) are $9,000,000. The tax rate is 35%. All bonds or stocks are issued at their par values. Interest is payable at the end of each year. Required: Which plan should company choose & why (i.e. Explain the rationale behind selecting the plan)? Provide all the detailed calculations.
The board of directors of Blossom Corporation is considering two plans for financing the purchase of new plant equipment. Plan #1 would require the issuance of $5,500,000, 8%, 20-year bonds at face value. Plan #2 would require the issuance of 200,000 shares of $5 par value common stock that is selling for $25 per share on the open market. Blossom Corporation currently has 120,000 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 $800,000 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. (If answer is zero please enter 0, do not leave any fields blank. Round earnings per share to 2 decimal places, e.g. 5.25.) Plan #1Issue Bonds Plan #2Issue Stock select an option…
Penny Arcades, Inc., is trying to decide between the following two alternatives to finance its new $30 million gaming center: a. Issue $34 million of 6% bonds at face amount.b. Issue 1 million shares of common stock for $34 per share. 1. Assuming bonds or shares of stock are issued at the beginning of the year, complete the income statement for each alternative. (Enter your answer in dollars, not millions. (i.e., $5.5 million should be entered as 5,500,000). Round your "Earnings per Share" to 2 decimal places. Round your "Earnings per Share" to 2 decimal places.) Issue Bonds Issue stock Operating income 10,900,000 10,900,000 Interest expense (bonds only) Income before tax Income tax expense (40%) Net Income Number of shares 3,900,000 4,900,000 Earnings per share
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Supa Inc. is considering plans A and B for financing their new Systems project of OMR 6 million. Plan A involves issuance of 250,000 shares of common stock at the current market price of OMR 2 per share. Plan B involves issuance of OMR 5 million, 8% bonds at face value. Income before interest and taxes on the new plant will be OMR2.5million. Income taxes are expected to be 20%. Supa, Inc. currently has 100,000 shares of common stock outstanding. Advice Supa Inc. as to which plan would be better and why? (The answer should show clear steps and calculations).
IMB has 1 million outstanding shares, currently trading at $10 each, and it is all-equity financed. Current earnings are $2 million, which also provide the company’s current cash holdings. At the next board meeting, the directors will be discussing whether to implement a new investment project, not yet known to the public. The project costs $1 million and it will generate expected earnings of $.5 million a year, in perpetuity starting one year from now. The appropriate discount rate for the project is 10%. If the project is not undertaken, the firm will pay a dividend of $2 a share. If the project is implemented, the firm must decide how to finance it. The board is considering two options: i) to finance the investment project by retaining earnings and paying only $1 dividend per share; ii) to keep the dividend at $2 per share, and to finance the project by issuing new equity. Shares are issued ex-dividend. Capital markets are perfect (no taxes).
NCC Corporation is considering building a new facility in Texas. To raise money for the capital projects, the corporation plans the following capital structure: 40% of money will come from issuing bonds, and 60% will come from Retained Earnings or new common stock. The corporation does not currently have preferred stock. NCC Corporation will issue bonds with an interest rate of 9%, up to $30 million dollars in bonds. After issuing $30 million in bonds, the interest cost will rise to 12.5%. The next dividend on common stock is expected to be $2.00 per share. The stock price is $16.00 per share, and is expected to grow at 3% per year. The flotation cost for issuing new common stock is estimated at 12%. NCC Corporation has $66 million in retained earnings that can be used. The tax rate for NCC Corporation is 35%. What is the WACC after the second breakpoint? 12.55% 19.10% 13.57% 16.66% 15.3%
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DAR Corporation is comparing two different capital structures: an all-equity plan (Plan I) and a levered plan (Plan II). Under Plan I, the company would have 195,000 shares of stock outstanding. Under Plan II, there would be 145,000 shares of stock outstanding and $2.1 million in debt outstanding. The interest rate on the debt is 8 percent annually, and there are no taxes. a. If EBIT is $550,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) EPS $ $ Plan I Plan II b. If EBIT is $800,000, what is the EPS for each plan? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) EPS $ $ Plan I Plan II c. What is the break-even EBIT? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.) Break-even EBIT

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