Bagan Corporation, a profitable growth company with 200,000 shares of common stock outstanding, is in need of approximately$40 million in new funds to finance required expansion. Currently, there are no other equities outstanding. Management has three options open.

(a) Sell $40 million of 12-percent bonds at face value

(b) Sell shares at $100 each (dividend $10 per share)

(c) Sell another 200000 shares of common stock at $200 each

Operating income (before interest and income taxes) on completion of the expansion is expansion is expected to average $ 12 million per year;the income tax rate is 50%

Required:

1) Complete the schedule below and calculate the earnings per share of common stock

income before interest and income taxes 12% bonds preferred stock common stock

less: interest expense $12000000 $12000000 $12000000

Income before taxes

Less: income taxes at 50%

Net income

Less: preferred dividends

Net income available to common

stockholders

number of common

shares outstanding.

earnings per share of common

stock

2) which financing option is most advantageous to common stockholders? why?