Penny Arcades, Inc., is trying to decide between the following two alternatives

Question

Penny Arcades, Inc., is trying to decide between the following two alternatives to finance its new $25 million gaming center

B. Issue 1 million shares of common stock for $25 per share.

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.)

Penny Arcades, Inc., is trying to decide between the following two alternatives to finance its new $25 million gaming center

Explanation / Answer

Alternative 1 ( if finance raised by bond issue)
$m (calculation)
Operating Income 11.6
intrest expense: 1.48 (25 * 6%)
profit before tax 10.12 (11.6-1.48)
Tax 3.54 (10.12*35)
Profit after Tax 6.58 (10.12-6.58)

earnings per share 2.19 (6.58/3.01)

--------------------------------------...
Alternative 2 ( if finance raised by share issue)
$m (calculation)
Operating Income 11.6 (as given in question)
intrest expense: - - (as no bond issue so no interest payment)
profit before tax 11.6
Tax 4.06 (11.6 * 35)
Profit after Tax 7.54 (11.6 - 4.06)
(or net profit)
earnings per share 1.88 (7.54/4.01) as new shares will be issued and will thus increase
numbe of shares and lower earnings per share

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