You hold a 25% common stock interest in You-Own-It, a family-owned construction equipment company. Your sister, who
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Plan 1. Issue $26,000,000 of 20-year, 8% notes at face amount
Plan 2. Issue an additional 550,000 shares of $10 par common stock at $20 per share, and $15,000,000 of 20-year, 8% notes at face amount
You Own It, Inc.
Balance Sheet
December 31, 20Y7
Assets
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,000,000
Property, plant, and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,500,000
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $37,500,000
Liabilities and Stockholders' Equity
Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,250,000
Common stock, $10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000,000
Paid-in capital in excess of par . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,750,000
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37,500,000
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 $2,667,000 in the previous year to $5,000,000 for this year. Your sister has asked you, as the company treasurer, to prepare an analysis of each financing plan.
1. Prepare a table indicating the expected earnings per share on the common stock under each plan. Assume an income tax rate of 40%. Round to the nearest cent.
2. a. Discuss the factors that should be considered in evaluating the two plans.
b. Which plan offers greater benefit to the present stockholders? Give reasons for your opinion.
Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...
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Related Book For
Accounting
ISBN: 978-1337899451
27th edition
Authors: Carl S. Warren, James M. Reeve, Jonathan Duchac
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