JM Electronics is considering two plans for raising $2,000,000 to expand operations. Plan A is to...

Transcribed Image Text:

JM Electronics is considering two plans for raising $2,000,000 to expand operations. Plan A is to issue 10% bonds payable, and plan B is to issue 100,000 shares of common stock. Before any new financing, JM Electronics has net income of $300,000 and 300,000 shares of common stock outstanding. Management believes the company can use the new funds to earn additional income of $600,000 before interest and taxes. The income tax rate is 21%. Analyze the JM Electronics situation to determine which plan will result in higher earnings per share. (Complete all input fields. Enter a 0 for any zero balances. Round earnings per share amounts to the nearest cent.) Begin by completing the analysis below for plan A, then plan B. Plan A: Issue $2,000,000 Plan B: Issue $2,000,000 of 10% Bonds Payable of Common Stock 300000 300000 Net income before new project Expected income on the new project before interest and income tax expenses 600000 200000 Less: Interest expense Project income before income tax 400000 84000 Less: Income tax expense 316000 Project net income Net income with new project Earnings per share with new project: Plan A Plan B will result in higher earnings per share. 600000 JM Electronics is considering two plans for raising $2,000,000 to expand operations. Plan A is to issue 10% bonds payable, and plan B is to issue 100,000 shares of common stock. Before any new financing, JM Electronics has net income of $300,000 and 300,000 shares of common stock outstanding. Management believes the company can use the new funds to earn additional income of $600,000 before interest and taxes. The income tax rate is 21%. Analyze the JM Electronics situation to determine which plan will result in higher earnings per share. (Complete all input fields. Enter a 0 for any zero balances. Round earnings per share amounts to the nearest cent.) Begin by completing the analysis below for plan A, then plan B. Plan A: Issue $2,000,000 Plan B: Issue $2,000,000 of 10% Bonds Payable of Common Stock 300000 300000 Net income before new project Expected income on the new project before interest and income tax expenses 600000 200000 Less: Interest expense Project income before income tax 400000 84000 Less: Income tax expense 316000 Project net income Net income with new project Earnings per share with new project: Plan A Plan B will result in higher earnings per share. 600000

Answer rating: 100% (QA)

Plan A Analysis Issue 2000000 of 10 Bonds Payable Net income before new project 300000 Expected inco... View the full answer