Banks Company Is Considering Two Alternatives to Finance Its Purchase

question 121

Essay

Banks Company is considering two alternatives to finance its purchase of a new $4,000,000 office building.
(a) Issue 400,000 shares of common stock at $10 per share.
(b) Issue 8%, 10-year bonds at par ($4,000,000).
Income before interest and taxes is expected to be $3,000,000. The company has a 30% tax rate and has 600,000 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:

Finished Goods Inventory

The completed products that are ready to be sold but have not yet been sold to customers.

Raw Materials Purchases

The acquisition of the basic materials and components needed for the production of goods.

Cost of Goods Sold

The direct costs attributable to the production of the goods sold by a company, including materials and labor costs.

Cash Collections

The process of gathering all cash receipts and payments, including those from customers and operational activities, within a particular period.