Carla Vista Inc. is considering two alternatives to finance its construction of a new $1.40 million plant.(a) Issuance of 140,000 shares of common stock at the market price of $10 per share.(b)Issuance of $1,400,000, 7% bonds at face value.Complete the following table. (Round earnings per share to 2 decimal places, e.g. 0.25.)Income before interest and taxesInterest expense from bondsIncome before income taxesIncome tax expense (40%)Net incomeOutstanding sharesEarnings per share$Indicate which alternative is preferable.Issue Stock$600,000Net income isbecause of the additional shares of stock that are outstanding.$V if stock is used. However, earnings per share isIssue Bond$600,000460,000V than earnings per share if bonds are used

The part of a company's income that is made accessible to shareholders and is distributed among all…

Answered: Carla Vista Inc. is considering two…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 5P

See similar textbooks

Similar questions

Brower Co. is considering the following alternative financing plans: Income tax is estimated at 40% of income. Determine the earnings per share of common stock, assuming that income before bond interest and income tax is 2,000,000.
Kelly Corporation is considering the issuance of either debt or preferred stock to finance the purchase of a facility costing P1.5 million. The interest rate on the debt is 16 percent. Preferred stock has a dividend rate of 12 percent. The tax rate is 46 percent. REQUIREMENTS: 1. What is the annual interest payment? 2. What is the annual dividend payment? 3. What is the required income before interest and taxes to satisfy the dividend requirement??
Skysong, Inc. had the following transactions during the current period.Skysong Inc. is considering these two alternatives to finance its construction of a new $1.50 million plant: Issuance of 150,000 shares of common stock at the market price of $10 per share. Issuance of $1.50 million, 5% bonds at face value. (a1) Complete the table. (Round earnings per share to 2 decimal places, e.g. 2.66.) eTextbook and Media Attempts: 0 of 2 used (a2). Indicate which alternative is preferable. is preferable. Mar. 2 Issued 5,100 shares of $5 par value common stock to attorneys in payment of a bill for $30,600 for services performed in helping the company to incorporate. June 12 Issued 65,000 shares of $5 par value common stock for cash of $406,250. July 11 Issued 1,000 shares of $100 par value preferred stock for cash at $112 per share. Nov. 28 Purchased 1,500 shares of treasury stock for $60,000. Journalize the transactions. (Record journal entries in the order presented in the problem. Credit…
Kingbird, Inc. is considering these two alternatives to finance its construction of a new $1.00 milion plant: 1. Issuance of 100,000 shares of common stock at the market price of $10 per share. 2. Issuance of $1.00 million, 5% bonds at face value. Complete the table. (Round earnings per share to 2 decimal places, e.g. $2.66.) Issue Stock Issue Bonds Income before interest and taxes $1,500,000 $1,500,000 Interest expense from bonds Income before income taxes Income tax expense (30%) Net income Outstanding shares 600,000 Earnings per share $ %24 %24 %24 %24
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.
Penny Arcades, Inc., is trying to decide between the following two alternatives to finance its new $34 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
Cheyenne Corp. is considering two alternatives to finance its construction of a new $2 million plant. (a) Issuance of 200,000 shares of common stock at the market price of $10 per share. (b) Issuance of $2 million, 7% bonds at face value. Complete the following table. (Round earnings per share to 2 decimal places, e.g. 0.25.) Issue Stock Issue Bond Income before interest and taxes $735,000 $735,000 Interest expense from bonds Income before income taxes Income tax expense (25%) Net income $ $ Outstanding shares 535,000 Earnings per share $ $ Indicate which alternative is preferable.Net income is lowerhigher if stock is used. However, earnings per share is lowerhigher than earnings per share if bonds are used because of the additional shares…
Seattle Adventures, Incorporated, is trying to decide between the following two alternatives to finance its new $17 million gaming center: a. Issue $17 million, 6% note. b. Issue 1 million shares of common stock for $17 per share with expected annual dividends of $1.02 per share. Required: 1. Assuming the note or shares of stock are issued at the beginning of the year, complete the income statement for each alternative. 2. Answer the following questions for the current year: (a) By how much are interest payments higher if issuing the note? (b) By how much are dividend payments higher by issuing stock? (c) Which alternative results in higher earnings per share?
Sleeping Bear Travel, Incorporated, is trying to decide between the following two alternatives to finance its new $24 million gaming center: Issue $24 million, 5% note. Issue 1 million shares of common stock for $24 per share with expected annual dividends of $1.20 per share. Required: 1. Assuming the note or shares of stock are issued at the beginning of the year, complete the income statement for each alternative. 2. Answer the following questions for the current year: (a) By how much are interest payments higher if issuing the note?(b) By how much are dividend payments higher by issuing stock?(c) Which alternative results in higher earnings per share?
Larkspur, Inc. is considering these two alternatives to finance its construction of a new $1.74 million plant: 1. 2. Issuance of 174,000 shares of common stock at the market price of $10 per share. Issuance of $1.74 million, 5% bonds at face value.
Larkspur, Inc. is considering these two alternatives to finance its construction of a new $1.15 milion plant: Issuance of 115,000 shares of common stock at the market price of $10 per share. Issuance of $1.15 million, 6% bonds at face value. 1. 2. Complete the table. (Round earnings per share to 2 decimal places, e.g. $2.66.) Issue Stock Issue Bonds Income before interest and taxes $1,510,000 $1,510,000 Interest expense from bonds Income before income taxes Income tax expense (30%) Net income $ $ Outstanding shares 610,000 Earnings per share $ $ %24
Penny Arcades, Incorporated, is trying to decide between the following two alternatives to finance its new $35 million gaming center. a. Issue $35 million, 7% note b. Issue 1 million shares of common stock for $35 per share with expected annual dividends of $2.45 per share. Required: 1. Assuming the note or shares of stock are issued at the beginning of the year, complete the income statement for each alternative. 2. Answer the following questions for the current year (a) By how much are interest payments higher if issuing the note? (b) By how much are dividend payments higher by issuing stock? (c) Which alternative results in higher earnings per share? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Answer the following questions for the current year: (a) By how much are interest payments higher if issuing the note? (b) By how much are dividend payments higher by issuing stock? (c) Which alternative results in higher earnings per share? (Enter…

SEE MORE QUESTIONS

Recommended textbooks for you

EBK CONTEMPORARY FINANCIAL MANAGEMENT

Finance

ISBN:

9781337514835

Author:

MOYER

Publisher:

CENGAGE LEARNING - CONSIGNMENT

Financial Accounting

Accounting

ISBN:

9781337272124

Author:

Carl Warren, James M. Reeve, Jonathan Duchac

Publisher:

Cengage Learning

EBK CONTEMPORARY FINANCIAL MANAGEMENT

Finance

ISBN:

9781337514835

Author:

MOYER

Publisher:

CENGAGE LEARNING - CONSIGNMENT

Financial Accounting

Accounting

ISBN:

9781337272124

Author:

Carl Warren, James M. Reeve, Jonathan Duchac

Publisher:

Cengage Learning

SEE MORE TEXTBOOKS