ACCT 309 Debt (Bonds) Vs. Equity (Stock) Financing Professor Hargadon The Cavaliere, Petrik, & Ayichi (CPA) Company is trying to determine the effects on pre-tax EPS of issuing bonds versus issuing shares of common stock to raise $400,000. The company's current net income is $150,000 (pre-tax) and there are 120,000 shares of common stock outstanding. The company does not have any preferred stock outstanding. Required: 1. Compute CPA's current earning per share (EPS) using before tax net income PRIOR to raising the $400,000. Pre-tax EPS: kebabs ob 000,001 og om 2. Assume CPA issues $400,000 of bonds @100 with a stated rate of interest of 5%. After ONE YEAR compute the new EPS. Assume pretax net income (excluding the interest expense on the bond) is still $150,000. [HINT: Compute the NEW pretax net income after taking into account the interest expense) Pre-tax EPS: 3. Ignore (2) and assume instead that the company decides to raise the $400,000 by issuing additional shares of common stock. The company's stock is selling for $25 per share. Assume again the pre-tax accounting income is $150,000. Compute the new pre-tax EPS. Pre-tax EPS: Over RECAP (ROUND THE EPS NUMBER TO TWO DECIMAL POINTS) Current pre-tax EPS Pre-tax EPS by Issuing Bonds Pre-tax EPS by Issuing Stock $1.25 5. Which form of financing of the $400,000 do you recommend and why? What other factors should be considered? Be clear! oorld