Sophia Company Is Considering Two Alternatives to Finance Its Purchase

question 12

Essay

Sophia 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 7%, 10-year bonds at par ($4,000,000).
Income before interest and taxes is expected to be $3,500,000. 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:

Allocating Risk

The process of identifying and distributing the potential financial, operational, or legal hazards among parties in a transaction or agreement.

Contract Law

A branch of law that deals with agreements between parties, their rights, and obligations.

Consideration

In contract law, consideration refers to something of value exchanged between parties that is necessary for a valid contract.

Binding Contract

A legal agreement between two or more parties that is enforceable by law.