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 to earn additional income of $700,000 before interest and taxes.
The income tax rate is 21%. Analyze the SB Electronics situation to determine which plan will result in higher earnings per share. Use Exhibit F:12-5 as a guide.