Knutsen Financial Services Ltd. needs to raise $3,000,000 to expand company operations. Knutsens president is considering two
Question:
Knutsen Financial Services Ltd. needs to raise $3,000,000 to expand company operations.
Knutsen’s president is considering two options:
• Plan A: $3,000,000 of 4 percent bonds payable to borrow the money
• Plan B: 300,000 common shares at $10.00 per share
Before any new financing, Knutsen Financial Services Ltd. expects to earn net income of $900,000, and the company already has 300,000 common shares outstanding. The president believes the expansion will increase income before interest and income tax by $600,000. The company’s income tax rate is 30 percent.
Required
Prepare an analysis similar to Exhibit 15–9 on page 842, to determine which plan is likely to result in the higher earnings per share. Which financing plan would you recommend for Knutsen Financial Services Ltd.? Give your reasons.
Exhibit 15–9
Step by Step Answer:
Horngrens Accounting
ISBN: 9780135359785
11th Canadian Edition Volume 2
Authors: Tracie Miller Nobles, Brenda Mattison, Ella Mae Matsumura, Carol A. Meissner, Jo Ann Johnston, Peter R. Norwood