2. Prince Equipment has to decide whether to obtain $1,000,000 of financing by: (1) selling common stock at its current price of $40 per share or (2) selling convertible bonds. The firm currently has 250,000 shares of common stock outstanding. If it issues convertible bonds, a bond will be sold at $1,000 par value and the convertible price at $45. Prince Equipment expects its earnings available to common stockholders to be $700,000 each year over the next several years.

i. Calculate the number of shares the firm would need to sell to (2 marks)

raise the $1,000,000.

ii. Find out the diluted earnings per share resulting from the sale of (2 marks)

common stock.

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iii.	Evaluate the number of shares outstanding once all convertible	(7 marks)
	bonds have been converted.
iv.	Assess the earnings per share associated with the bond financing	(2 marks)
	after conversion.
v.	Which of the financing alternatives would you recommend the	(3 marks)
	company adopt? Why?

3. Ryan is the financial manager of Open Corporation. He has been asked to conduct a lease-versus-purchase analysis on a new molding machine. The machine costs $360,000 and will be depreciated by the straight-line method over 5 years with zero residual value.

Alternatively, the company can lease the machine with year-end payments of $95,000 over 5 years from Alpha Finance. The companys tax rate is 35% and its before-tax cost of borrowing is 10%.

Should the company lease or purchase the machine? Support your

answer with detail computations. (8 marks)