Chapter 15 Discussion Case 2

Chapter 15 Discussion Case 2 - 1,800,000 1,550,000 Earnings...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
PLAN A BORROW AT 6% PLAN B ISSUE COMMON STOCK PLAN C ISSUE $2.50 NONVOTING PREFERRED STOCK Net income before new project $1,200,00 0 $1,200,00 0 $1,200,00 0 Expected income on the new project before interest and income tax expenses 1,000,000 1,000,000 1,000,000 Less: Interest expense ($4,000,000 x .06) 240,000 0 0 Project income before income tax 760,000 1,000,000 1,000,000 Less: Income tax expense (40%) 304,000 400,000 400,000 Less: Preferred dividend 0 0 250,000 Project net income 456,000 600,000 350,000 Net income with new project 1,656,000
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: 1,800,000 1,550,000 Earnings per share with new project l 4.140 l 3.600 l 3.875 Req. 2 (recommendation) The highest earning per share would most likely come from borrowing at 6%. Plan A offers $4.14 per share. The other two plans, B and C, offer only 3.6 and 3.875 per share. The borrowing at 6% may put the Email Designers in debt but if the directors were to chose to share equity, loss of company control is possible with plans B and C. So I would advise that the directors chose plan A....
View Full Document

Page1 / 2

Chapter 15 Discussion Case 2 - 1,800,000 1,550,000 Earnings...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online