Loren Company is considering two alternatives to finance its purchase of a new $4000000 office building.
(a) Issue 400000 shares of common stock at $10 per share.
(b) Issue 7% 10-year bonds at par ($4000000).
Income before interest and taxes is expected to be $3500000. The company has a 30% tax rate and has 600000 shares of common stock outstanding prior to the new financing.
Instructions
Calculate each of the following for each alternative:
(1) Net income.
(2) Earnings per share.

Question

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The Answer of Loren Company is considering two alternatives to finance its purchase of a new $4000000 office building.
(a) Issue 400000 shares of common stock at $10 per share.
(b) Issue 7% 10-year bonds at par ($4000000).
Income before interest and taxes is expected to be $3500000. The company has a 30% tax rate and has 600000 shares of common stock outstanding prior to the new financing.
Instructions
Calculate each of the following for each alternative:
(1) Net income.
(2) Earnings per share.

Loren Company Is Considering Two Alternatives to Finance Its Purchase