solution

Analyzing alternative plans to raise money

NM Electronics is considering two plans for raising $2,000,000 to expand operations. Plan A is to issue 7% bonds payable, and plan B is to issue 200,000 shares of common stock. Before any new financing, NM has net income of $200,000 and 100,000 shares of common stock outstanding. Management believes the company can use the new funds to earn additional income of $400,000 before interest and taxes. The income tax rate is 30%. Analyze the NM Electronics situation to determine which plan will result in higher earnings per share. Use Exhibit 14-6 as a guide.