LEVERAGE Cook Corporation issued financial statements at December 31, 2008, that include the following information:

Balance sheet at December 31, 2008:

Assets $8,000,000 Liabilities 1,200,000 Stockholders’ equity (300,000 shares) 6,800,000 Income statement for 2008:

Income from operations $1,200,000 Less: Interest expense 100,000 Income before taxes $1,100,000 Less: Income taxes expense (0.30) 330,000 Net income $ 770,000 The levels of assets, liabilities, stockholders’ equity, and operating income have been stable in recent years; however, Cook Corporation is planning a $1,800, 000 expansion program that will increase income from operations by $350,000 to $1,550,000. Cook is planning to sell 8.5 percent notes at par to finance the expansion.

Required:

. What earnings per share does Cook report before the expansion?

. What earnings per share will Cook report if the proposed expansion is undertaken?

Would this use of leverage be advantageous to Cook’s stockholders? Explain.

. Suppose income from operations will increase by only $150,000. Would this use of leverage be advantageous to Cook’s stockholders? Explain.

. Suppose that income from operations will increase by $200,000 and that Cook could also raise the required $1,800,000 by issuing an additional 100,000 shares of capital stock. Which means of financing would stockholders prefer? Explain.

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