Help! Frontier City is trying to decide between the following two alternatives t

Question

Help! Frontier City is trying to decide between the following two alternatives to finance its new $20.0 million roller coaster a. Issue $20.0 million of 16.0% bonds at face amount. b. Issue 2.00 million shares of common stock for $10 per share a. Assuming bonds or shares of stock are issued at the beginning of the year, complete the income statement listed below for each alternative. (Enter your answers in dollars, not in millions. Round your "Earnings per Share" to 2 decimal places.) Issue Bonds Issue Stock Operating income Interest expense (bonds only) Income before tax Income tax expense (30%) Net income Number of shares Earnings per share $ 6,200,000 6,200,000 3,200,000 6,200,000 1,860,000 0 4,340,000 5,000,000 3,000,000 b. Which alternative results in the highest earnings per share? (Round your "Earnings per Share" to 2 decimal places.) Highest earnings per share

Explanation / Answer

Answer a

Answer b

Inssue of stock results in highest earnings per share = $0.87 per share

Issues Bonds ($) Issue Stocks ($) Operating Income 6,200,000 6,200,000 Interest Expense 3,200,000 6,200,000 Income before tax 3,000,000 6,200,000 Income tax expenses (30 %) 900,000 1,860,000 Net Income $2,100,000 $4,340,000 Numberof Shares 3,000,000 5,000,000 Earning Per Share $0.70 $0.87

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