Farar, Inc. projects operating income of $4 million next year.

Farar, Inc. projects operating income of $4 million next year. The firm’s income tax rate is 40%. Farar presently has 750,000 shares of common stock, no preferred stock, and no debt. The firm is considering the issuance of $6 million of 10% bonds to finance a new product that is not expected to generate an increase in income for two years. If Farar issues the bonds this year, what will projected EPS be next year?
A.
$1.53
B.
$1.98
C.
$3.12
D.
$2.33
E.
$2.72

Solution