Loren Company Is Considering Two Alternatives to Finance Its Purchase

question 4

Essay

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.

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Definitions:

User Cost

The cost associated with the use of a product or service, including purchase cost, maintenance, and operating expenses, as well as opportunity costs.

Extraction Cost

The expenses associated with the removal of raw materials or resources from their natural setting, which can include labor, equipment, and operational costs.

User Cost

The cost associated with using a capital asset, considering both the depreciation of the asset and the foregone interest that could have been earned by investing funds elsewhere.

Nonrenewable Resource

A natural resource that cannot be replenished at the same rate at which it is consumed.