Compute earnings-per-share effects of financing with bonds versus stock
Response to the following problem:
Waterfront Marina needs to raise $1.5 million to expand the company. Waterfront Marina is considering the issuance of either
¦ $1,500,000 of 6% bonds payable to borrow the money, or
¦ 150,000 shares of common stock at $10 per share.
Before any new financing, Waterfront Marina expects to earn net income of $400,000, and the company already has 100,000 shares of common stock outstanding. Waterfront Marina believes the expansion will increase income before interest and income tax by $200,000. The income tax rate is 30%.
Prepare an analysis to determine which plan is likely to result in the higher earnings per share. Based solely on the earnings-per-share comparison, which financing plan would you recommend for Waterfront Marina?