Speegleville Marina needs to raise \(\$ 1\) million to expand. Speegleville's president is considering two plans:

- Plan A: Issue \(\$ 1,000,000\) of \(8 \%\) bonds payable to borrow the money

- Plan B: Issue 100,000 shares of common stock at \(\$ 10\) per share Before any new financing, the company expects to earn net income of \(\$ 300,000\), and the company already has 100,000 shares of common stock outstanding. Speegleville believes the expansion will increase income before interest and income tax by \(\$ 200,000\). The income tax rate is \(35 \%\).

Prepare an analysis similar to Exhibit 15-4 to determine which plan is likely to result in higher earnings per share. Which financing plan would you recommend? 

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EXHIBIT 15-4 Earnings-per-Share Advantage of Borrowing Versus Issuing Stock Net income before new project Expected income on the new project before interest and income tax expenses Less: Interest expense ($500,000 x 0.10) Project income before income tax Less: Income tax expense (40%) Project net income Net income with new project Earnings per share with new project: Plan 1 ($390,000/100,000 shares) Plan 2 ($420,000/150,000 shares) Plan 1 Issue $500,000 of 10% Bonds Payable $200,000 (50,000) 150,000 (60,000) Plan 2 Issue $500,000 of Common Stock $300,000 $300,000 $200,000 200,000 (80,000) 90,000 $390,000 120,000 $420,000 $3.90 $2.80