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The Emporis Oil Corporation plans to invest $1 million in oil exploration. The corporation is...

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Accounting

The Emporis Oil Corporation plans to invest $1 million in oil exploration. The corporation is considering two plans to raise the money. Under Plan #1, 9% bonds would be issued at par. Under Plan #2, additional common shares would be sold at $20 per share. The corporation currently has 300,000 common shares outstanding, and total equity of $3,000,000. The corporation expects to earn $700,000 each year before bond interest and taxes. Calculate profit under each plan (assume a 50% tax rate) and comment on the relative effects of each alternative.

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