Response to the following problem:
The board of directors of Gibson Corporation is considering two plans for financing the purchase of new plant equipment.
Plan-1 would require the issuance of $4,000,000, 6%, 20-year bonds at face value.
Plan-2 would require the issuance of 100,000 shares of $5 par value common stock which is selling for $40 per share on the open market.
Gibson Corporation currently has 100,000 shares of common stock outstanding and the income tax rate is expected to be 30%. Assume that income before interest and income taxes is expected to be $800,000 if the new factory equipment is purchased.
Instructions
Prepare a schedule which shows the expected net income after taxes and the earnings per share on common stock under each of the plans that the board of directors is considering.