Metlock, Inc.currently has 740,000 shares of common stock outstanding. Metlock,

Question

Metlock, Inc.currently has 740,000 shares of common stock outstanding. Metlock, Inc. is considering these two alternatives to finance its construction of a new $1.80 million plant:
1. Issuance of 180,000 shares of common stock at the market price of $10 per share. 2. Issuance of $1.80 million, 8% bonds at face value. Metlock, Inc.currently has 740,000 shares of common stock outstanding. Metlock, Inc. is considering these two alternatives to finance its construction of a new $1.80 million plant: 1. Issuance of 180,000 shares of common stock at the market price of $10 per share. 2. Issuance of $1.80 million, 8% bonds at face value. Complete the table. (Round earnings per share to 2 decimal places, e.g. $2.66.) Issue Stock Issue Bonds Income before interest and taxes Interest expense from bonds Income before income taxes Income tax expense (40%) Net income Outstanding shares 740,000 Earnings per share

Explanation / Answer

Issue Shares Issue Bonds Income before interest and taxes 1640000 1640000 Interest expense from bonds 0 144000 Income before income taxes 1640000 1496000 Income tax expense (40%) 656000 598400 Net income 984000 897600 Outstanding shares 920000 740000 Earnings per share 1.07 1.21

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