Campbell Inc

question 60

Essay

Campbell Inc. has net income of $500,000 and 200,000 shares of common stock. The company is considering a project which requires $800,000 and is considering two options:
• Option 1 is to borrow $800,000 at 12%.
• Option 2 is to issue 100,000 shares of common stock for $800,000.
Considering all relevant facts and figures, Campbell's management is of the opinion that the funds raised can be used to increase income before interest and taxes by $300,000 each year. The company estimates income tax expense to be 40%. Analyze the Campbell situation to determine which plan will result in higher earnings per share.

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Definitions:

Marginal Cost

The increase in total cost that arises from producing one additional unit of a product or service.

Maximize Profit

To maximize profit, a firm seeks to increase the difference between its total revenues and total costs through optimal pricing strategies and efficient production.

Marginal Cost

Marginal cost represents the increase or decrease in the total cost of production when the quantity produced is incremented by one unit.

Purely Competitive Firm

A business that operates in a market with many buyers and sellers, where each firm has no control over the market price and produces a homogeneous product.