Question

Shamrock, Inc. is considering these two alternatives to finance its construction of a new $1.61 million plant:

1.		Issuance of 161,000 shares of common stock at the market price of $10 per share.
2.		Issuance of $1.61 million, 8% bonds at face value.

Complete the table. (Round earnings per share to 2 decimal places, e.g. $2.66.)

		Issue Stock		Issue Bonds
Income before interest and taxes		$1,472,000		$1,472,000
Interest expense from bonds		enter a dollar amount		enter a dollar amount
Income before income taxes		enter a subtotal of the two previous amounts		enter a subtotal of the two previous amounts
Income tax expense (30%)		enter a dollar amount		enter a dollar amount
Net income		$enter a total net income		$enter a total net income
Outstanding shares		enter a number of shares		644,000
Earnings per share		$enter earnings per share rounded to 2 decimal places		$enter earnings per share rounded to 2 decimal places

Answer 1

	Issue Stock	Issue Bonds
Income before interest and taxes	1472000	1472000
Interest expense from bonds	0	128800
Income before income taxes	1472000	1343200
Income tax expense (30%)	441600	402960
Net income	1030400	940240
Outstanding shares	805000	644000
Earnings per share	1.28	1.46
Workings:
Interest expense from bonds	128800	=1610000*8%
Outstanding shares for Issue Stock	805000	=644000+161000