Question

Alliance Agreement Corporation is considering two plans for raising $2,500,000 to expand its current operations. The first plan involves the sale of $2,500,000, 8%, 10-year bonds sold at face value. The second plan involves selling 50,000 common shares at $50 each. Alliance Agreement Corporation currently has outstanding 200,000 shares of stock and net income of $900,000. Either plan is expected to generate additional income of $400,000 before interest and taxes. The income tax rate is 30%. Calculate earnings per share for both plans.

Please provide the details of each plans individually.

Answer 1

Calculation of earning per share			Plan 1	plan 2
Particulars			Amount	amount
additional earning before interest & tax			400000	400000
less: interest (2500000*8%)			200000	-
earning bnefore tax			200000	400000
less: Tax @ 30%			60000	120000
Net income			140000	280000
add: current net income			900000	900000
total net income (A)			1040000	1180000
no of outstanding share (B)			200000	250000
Earning per share (A)/(B)			5.2	4.72
no of share outstanding of plan 2 = 200000+ 50000 = 250000 share