Penny Arcades, Inc., is trying to decide between the following two alternatives to finance its new $25 million gaming center
| a. |
Issue $25 million of 6% bonds at face amount. |
| b. |
B. Issue 1 million shares of common stock for $25 per share.\
| 1. |
Assuming bonds or shares of stock are issued at the beginning of the year, complete the income statement for each alternative. (Leave no cells blank - be certain to enter "0" wherever required. Enter your answers in dollars not in millions. Input all amounts as positive values. Round your "Earnings per Share" to 2 decimal places. Omit the "$" sign in your response.)
|
|
Issue Bonds |
Issue Stock |
| Operating income |
$ |
10,000,000 |
$ |
10,000,000 |
| Interest expense (bonds only) |
|
|
|
|
|
|
|
|
|
| Income before tax |
|
|
|
|
| Income tax expense (30%) |
|
|
|
|
|
|
|
|
|
| Net income |
$ |
|
$ |
|
|
|
|
|
|
| Number of shares |
|
3,000,000 |
|
4,000,000 |
| Earnings per share |
$ |
|
$ |
|
|
|
|
|
|
|
|
| 2. |
Which alternative results in the highest earnings per share? |