Penny Arcades, Inc., is trying to decide between the following two alternatives to finance its new $80 million gaming center:
a. Issue $80 million of 5% bonds at face amount.
b. Issue 2 million additional shares of common stock for $40 per share.

Required:
1. Assuming bonds or shares of stock are issued at the beginning of the year complete the income statement for each alternative.
2. Which alternative results in the highest earnings pershare?

Transcribed Image Text:

Issue Bonds Issue Stock Operating income Interest expense (bonds only) Income before tax Income tax expense (35%) Net Income Number of shares Earnings per share (Net income/# of shares) S12,000,000 $12,000,000 2,000,000 4,000,000 S