CP 112

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 12per cent bonds at face value.

b. Sell shares of 10% preferred stock: 400,000 shares at $100 each (dividend $10 per share).

c. Sell another 200,000 shares of common stock at $200each.Operating income (before interest and income taxes) on completion of the 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 pershare of commonstock.12%bondsPreferred stock Common stock Income before interest and incometaxes$12,000,000$12,000,000$12,000,000Less: Interest expense Income before taxes Less: Income taxes at50%Net income Less: Preferred dividends Net income available to common stockholders Number of common shares outstanding Earnings per share of commonstock2.Which financing option is most advantageous to the common stockholders? Why?