Jackson Corporation is planning a $200,000 expansion to meet increasing demand for its product. Jackson Corporation...

 

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Jackson Corporation is planning a $200,000 expansion to meet increasing demand for its product. Jackson Corporation is considering two plans to raise the money. Under Plan A, bonds with a contract rate of interest of 8% would be issued. Under Plan B, 10,000 additional ordinary shares would be issued at $20 per share. The corporation currently has 100,000 shares outstanding, and it expects to earn $300,000 per year before bond interest and income taxes. The net profit and return on investment for both plans is shown below: Plan B 300,000 Plan A 300,000 $ (16,000) 284,000 $ (99,400) 184,600 $ Earnings before bond interest and taxes $ Bond interest expense 300,000 (105,000) 195,000 Income before taxes Income taxes Net profit Equity Return on Equity $2,000,000 $2.200,000 9.23% 8.86% Required: Please compare the above two plans to raise the money. %24 Jackson Corporation is planning a $200,000 expansion to meet increasing demand for its product. Jackson Corporation is considering two plans to raise the money. Under Plan A, bonds with a contract rate of interest of 8% would be issued. Under Plan B, 10,000 additional ordinary shares would be issued at $20 per share. The corporation currently has 100,000 shares outstanding, and it expects to earn $300,000 per year before bond interest and income taxes. The net profit and return on investment for both plans is shown below: Plan B 300,000 Plan A 300,000 $ (16,000) 284,000 $ (99,400) 184,600 $ Earnings before bond interest and taxes $ Bond interest expense 300,000 (105,000) 195,000 Income before taxes Income taxes Net profit Equity Return on Equity $2,000,000 $2.200,000 9.23% 8.86% Required: Please compare the above two plans to raise the money. %24

Answer rating: 100% (QA)

Answers The company will issue bonds worth 200000 8 So annual interest expense will ... View the full answer