You hold a 30% common stock interest in the family-owned business, a vending machine company. Your sister, who is the manager, has proposed an expansion of plant facilities at an expected cost of $6,000,000. Two alternative plans have been suggested as methods of financing the expansion. Each plan is briefly described as follows:

• Plan 1. Issue $6,000,000 of 15-year, 8% bonds at face amount.
• Plan 2. Issue an additional 100,000 shares of $20 par common stock at $25 per share, and $3,500,000 of 15-year, 8% bonds at face amount.

The balance sheet as of the end of the previous fiscal year is as follows:

MOJAVE OASIS, INC. Balance Sheet December 31, 20Y6
Assets
Current assets	$10,000,000
Property, plant, and equipment	15,000,000
Total assets	$25,000,000
Liabilities and Stockholders' Equity
Liabilities	$ 7,000,000
Common stock, $20	8,000,000
Paid-in capital in excess of par	300,000
Retained earnings	9,700,000
Total liabilities and stockholders' equity	$25,000,000

Net income has remained relatively constant over the past several years. The expansion program is expected to increase yearly income before bond interest and income tax from $900,000 in the previous year to $1,200,000 for this year. Your sister has asked you, as the company treasurer, to gather an analysis of each financing plan.

• Calculate the expected pre-tax earnings per share on the common stock under each plan.
• Discuss at least two factors that should be considered in evaluating the two plans.

Answer rating: 100% (QA)

To calculate the expected pretax earnings per share on the common stock under each plan we need to determine the net income attributable to common sto... View the full answer