Campbell, Inc. has net income of $500,000 and 200,000 shares of common stock. The company is considering
Question:
Campbell, Inc. has net income of $500,000 and 200,000 shares of common stock. The company is considering a project that requires $800,000 and is considering two options:
• Option 1 is to borrow $800,000 at 12%.
• Option 2 is to issue 100,000 shares of common stock for $800,000.
Considering all relevant facts and figures, Campbell's management is of the opinion that the funds raised can be used to increase income before interest and taxes by $300,000 each year. The company estimates income tax expense to be 40%. Analyze the Campbell situation to determine which plan will result in higher earnings per share. (Round your answers to two decimal points.)
Option 1 Option 2
Net income before new project $ xx $ xx
Expected income on the new project
before interest and income tax
expenses $ xx $ xx
Less: Interest Expense
($xx × xx%) xx x
Project income before income tax xx xx
Less: Income tax expense xx xx
Project net income xx xx
Net income with new project $622,400 $xx
Earnings per share with new project
Option 1 ($xx / xx) x
Option 2 ($xx / xx) x
Expert Answer:
Option 1 option 2 Net income before new project 500000 500000 Expected income on the new project b... View the full answer
