The Howland Carpet Company has grown rapidly during the past 5 years. Recently, its commercial bank urged the company to consider increasing its permanent financing.pg.12 Its bank loan under a line of credit has risen to $250,000, carrying an 8% interest rate.

Howland has been 30 to 60 days late in paying trade creditors.

Discussions with an investment banker have resulted in the decision to raise $500,000 at this time. Investment bankers have assured the firm that the following alternatives are feasible (flotation costs will be ignored).

• Alternative 1: Sell common stock at $8.

• Alternative 2: Sell convertible bonds at an 8% coupon, convertible into 100 shares of common stock for each $1,000 bond (i.e., the conversion price is $10 per share).

• Alternative 3: Sell debentures at an 8% coupon, each $1,000 bond carrying 100 warrants to buy common stock at $10.

John L. Howland, the president, owns 80% of the common stock and wishes to maintain control of the company. There are 100,000 shares outstanding. The following are extracts of Howland’s latest financial statements:

Balance Sheet Current liabilities $400,000 Common stock, par $1 100,000 Retained earnings 50,000 Total assets $550,000 Total claims $550,000 782 Part 8: Tactical Financing Decisions Income Statement Sales $1,100,000 All costs except interest 990,000 EBIT $ 110,000 Interest 20,000 EBT $ 90,000 Taxes (40%) 36,000 Net income $ 54,000 Shares outstanding 100,000 Earnings per share $ 0.54 Price/earnings ratio 15.83 Market price of stock $ 8.55