Collingwood (CL) is planning to raise 10 million through a debt issue with these alternatives;

1. a 20 year, 8% convertible debenture issue with a $50 conversion price and $1,000 par value.

2. A 20-year,10% straight bond issue. Each $1,000 bond has a detachable warrant to purchase 20 shares for $50 a share.

The company has a 30% tax rate and its stock is currently selling at $40 per share. The firm's earnings before interest and taxes are 20% of its capitalization which is currently is:

Common stock (par $5)$5,000,000

Contributed capital 10,000,000

Retained earnings 15,000,000

Total capitalization $30,000,000

Required:

Complete the attached schedule to answer the following

a)Show the capitalization resulting from each alternative immediately after the issue.

b) Assume that the conversion or the exercise of the warrants take place immediately after the issue in part (a). Show the capitalization resulting from each alternative after the conversion or exercise of the warrants.

c) Prepare partial pro forma profit and loss statements to show earnings per share under: 1) After the issue of the debt as in part (a) and

2) After the conversion or exercise of warrants as in part (b)

What differences do you observe in part (c)? Why?