(Learning Objective 4: Earnings per share effects of financing with bonds versus stock) Assume that YouTube, Inc., needs $1 million to expand the company. YouTube is considering the issuance of either
• $1,000,000 of 7% bonds payable to borrow the money, or
• 100,000 shares of common stock at $10 per share
Before any new financing, YouTube expects to earn net income of $400,000, and the company already has 200,000 shares of common stock outstanding. YouTube believes the expansion will increase income before interest and income tax by $200,000. YouTube’s income tax rate is 30%.To determine which plan is likely to result in the higher earnings per share. Based solely on the earnings per share comparison, which financing plan would you recommend for YouTube?