Conrad Corporation plans to raise $8 million to pay off its existing short-term bank loan of $2.4 million and to increase total assets by $5,600,000.
The bank loan bears an interest rate of 12 percent.he company's president owns 55 % of the 4,000,000 shares of common stock and wishes to maintain control of the company.
The company's tax rate is 35%. Balance sheet information is shown below.
The company is considering two alternatives to raise the $8 million:
1) sell common stock at $20 per share, or (2) Sell bonds at a 12% coupon, each $1,000 bond carrying 25 warrants to buy common stock at $30 per share.
Current Balance Sheet
			Current Liabilities	$3,000,000
			Common Stock, Par $0.50	2,000,000
			Retained earnings	1,400,000
Total Assets	$6,400,000		Total claims	$6,400,000
Alternative 1: Common stock	$20		Tax rate	35%
# new shares	400,000		New financing	$8,000,000
Par value per share	$0.50		Existing Loan	$2,400,000
			Interest rate	12%
Alternative 2: Debentures	12%		Interest amount - old	$288,000
Exercise price per warrant	$30		Interest amount - new	$960,000
# bonds to raise 4M	8,000
# new shares	200,000		President owns	55.0%
warrants per bond	25		Shares outstanding	4,000,000
New money raised	6,000,000
Addition to par	100,000
Additional paid-in capital	5,900,000
a. Show the new balance sheet under both alternatives. For Alternatives 2, show the balance sheet after exercise of the warrants.
b. Calculate the president's ownership position for both alternatives. He doesn't buy any of the additional shares.
c. Calculate earnings per share for both alternatives, assuming that EBIT is 15% of total assets.
d. Calculate the debt ratio under both alternatives
e. Which alternative do you recommend and why?