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Banks Company is considering two alternatives to finance its purchase of a new $4,000,000 office building

Accounting

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Banks Company is considering two alternatives to finance its purchase of a new $4,000,000 office building.

(a)   Issue 400,000 ordinary shares 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 ordinary shares outstanding prior to the new financing.

Instructions

Calculate each of the following for each alternative:

(1)   Net income.

(2)   Earnings per share.