The Emporis Oil Corporation Plans to Invest $1 Million in Oil

The Emporis Oil Corporation plans to invest $1 million in oil exploration.The corporation is considering two plans to raise the money.Under Plan #1,9% bonds would be issued at par.Under Plan #2,additional common shares would be sold at $20 per share.The corporation currently has 300,000 common shares outstanding,and total equity of $3,000,000.The corporation expects to earn $700,000 each year before bond interest and taxes.Calculate profit under each plan (assume a 50% tax rate)and comment on the relative effects of each alternative.
$\begin{array}{|l|r|r|}\hline & \text { Plan \#1 } & \text { Plan \#2 } \\\hline \text { Earnings before bond interest and taxes } & \$ 700,000 & \$ 700,000 \\\hline \text { Bond inter est expense } & \$ 90,000 & \\\hline \text { Income before taxes } & \$ 610,000 & \$ 700,000 \\\hline \text { Income taxes } & 305,000 & \$ 350,000 \\\hline \text { Net income } & \$ 305,000 & \$ 350,000 \\\hline\end{array}$