Question: Knutsen Financial Services Ltd. needs to raise $3,000,000 to expand company operations. Knutsen's president is considering two options: Plan A: $3,000,000 of 4 percent

Knutsen Financial Services Ltd. needs to raise $3,000,000 to expand company operations. Knutsen's president is considering two options:

• Plan A: $3,000,000 of 4 percent bonds payable to borrow the money

• Plan B: 300,000 common shares at $10.00 per share

Before any new financing, Knutsen Financial Services Ltd. expects to earn net income of $900,000, and the company already has 300,000 common shares outstanding. The president believes the expansion will increase income before interest and income tax by $600,000. The company's income tax rate is 30 percent.

Required

Prepare an analysis similar to Exhibit 15-9 on page 861, to determine which plan is likely to result in the higher earnings per share. Which financing plan would you recommend for Knutsen Financial Services Ltd.? Give your reasons.

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