A company wishing to expand can obtain the necessary funds by borrowing on a long- term note payable or by issuing 50,000 shares of $10 par value common stock. Net income is estimated at $302,500 if the company borrows the funds, and $330,000 if the company issues stock. The company currently has 250,000 shares of common stock outstanding. If the company issues stock instead of borrowing funds, earnings per share would

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Issuing stock increases the number of shares, which dilutes earnings per share (EPS). The EPS with borrowing is $302,500 / 250,000 = $1.21. The EPS with issuing stock is $330,000 / 300,000 = $1.10. The EPS decreases by $0.11.

A Company Wishing to Expand Can Obtain the Necessary Funds