Question Details

Prepare a schedule which shows the expected net income after taxes 



Ex. 1
Banks Company is considering two alternatives to finance its purchase of a new $4,000,000 office building.
(a)	Issue 400,000 ordinary shares at $10 per share.
(b)	Issue 8%, 10-year bonds at par ($4,000,000).

Income before interest and taxes is expected to be $3,000,000. The company has a 30% tax rate and has 600,000 ordinary shares outstanding prior to the new financing.

Instructions
Calculate each of the following for each alternative:
(1)	Net income.
(2)	Earnings per share.


Ex. 2
The board of directors of Gibson Corporation is considering two plans for financing the purchase of new plant equipment. Plan #1 would require the issuance of $4,000,000, 6%, 20-year bonds at face value. Plan #2 would require the issuance of 100,000 ordinary shares with a $5 par value which are selling for $40 per share on the open market. Gibson Corporation currently has 100,000 ordinary shares outstanding and the income tax rate is expected to be 30%. Assume that income before interest and income taxes is expected to be $500,000 if the new factory equipment is purchased.

Instructions
Prepare a schedule which shows the expected net income after taxes and the earnings per share under each of the plans that the board of directors is considering.




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