ReuthCorporation plans to raise $2 million to pay off its existing short-term bank loan of $600,000 and to increase total assets by $1,400,000.The bank loan bears an interest rate of 10 percent.The company's president owns51.5% percent of the 4,000,000 shares of common stock and wishes to maintain control of the company. The company's tax rate is 20 percent.Balance sheet information is shown below.

The company is considering two alternatives to raise the $2 million: (1) sell common stock at $10 per share, or (2) Sell bonds at a 10 percent coupon, each $1,000 bond carrying 50 warrants to buy common stock at $15 per share.

Current Balance SheetCurrent Liabilities$900,000Common Stock, Par $0.251,000,000Retained earnings700,000Total Assets$2,600,000Total claims$2,600,000Alternative 1: Common stock$10FACTSAlternative 1: Common stock# new shares200,000Tax rate20%# new sharesPar value per share$0.25New financing$2,000,000Par value per shareExisting Loan$600,000Alternative 2: DebenturesInterest rate10%Alternative 2: DebenturesExercise price per warrant$15Interest amount - old$60,000Exercise price per warrant# bonds to raise new capital2,000Interest amount - new$200,000# bonds to raise 2M# new shares100,000# new shareswarrants per bond50President owns51.5%warrants per bondNew money raised1,500,000Shares outstanding4,000,000New money raisedAddition to par25,000Addition to parAdditional paid-in capital1,475,000Additional paid-in capital

a.Show the new balance sheet under both alternatives.For Alternatives 2, show the balance sheet afterexercise 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 11% of total assets.

d.Calculatethe debt ratio under both alternatives

e.Which alternative do you recommend and why?