Warrant/Convertible decisions

The Howland Carpet Company has grown rapidly during the past 5 years. Recently, its commercial bank urged the company to consider increasing its permanent financing. Its bank loan under a line of credit has risen to $250,000, carrying an 8% interest rate. Howland has been 30 to 60 days late in paying trade creditors.

Discussions with an investment banker have resulted in the decision to raise $500,000 at this time. Investment bankers have assured the firm that the following alternatives are feasible (flotation costs will be ignored).

• Alternative 1: Sell common stock at $8.
• Alternative 2: Sell convertible bonds at an 8% coupon, convertible into 100 shares of common stock for each $1,000 bond (i.e., the conversion price is $10 per share).
• Alternative 3: Sell debentures at an 8% coupon, each $1,000 bond carrying 100 warrants to buy common stock at $10.

John L. Howland, the president, owns 80% of the common stock and wishes to maintain control of the company. There are 100,000 shares outstanding. The following are extracts of Howland's latest financial statements:

Balance Sheet
			Line of credit	$250,000
			Other current liabilities	150,000
			Long-term debt	0
			Common stock, par $1	100,000
			Retained earnings	50,000
Total assets	$550,000		Total claims	$550,000

Income Statement
Sales	$1,100,000
All costs except interest	990,000
EBIT	$ 110,000
Interest	20,000
Pre-tax earnings	$ 90,000
Taxes (25%)	22,500
Net income	$ 67,500
Shares outstanding	100,000
Earnings per share	$ 0.68
Price/earnings ratio	12.67
Market price of stock	$ 8.55

1. Show the new balance sheet under each alternative. For Alternatives 2 and 3, show the balance sheet after conversion of the bonds or exercise of the warrants. Assume that half of the funds raised will be used to pay off the bank loan and half to increase total assets. Do not round intermediate calculations. Round your answers to the nearest dollar. If an amount is zero, enter "0".

   	Balance Sheet
   	Alternative 1
   		LOC	$
   		Other current liabilities	$
   		Long-term debt	--
   		Common stock, par $1	$
   		Paid-in capital	$
   		Retained earnings	$
   Total assets	$	Total claims	$

   	Balance Sheet
   	Alternative 2
   		LOC	$
   		Other current liabilities	$
   		Long-term debt	--
   		Common stock, par $1	$
   		Paid-in capital	$
   		Retained earnings	$
   Total assets	$	Total claims	$

   	Balance Sheet
   	Alternative 3
   		LOC	$
   		Other current liabilities	$
   		Long-term debt (8%)	$
   		Common stock, par $1	$
   		Paid-in capital	$
   		Retained earnings	$
   Total assets	$	Total claims	$

2. Show Mr. Howland's control position under each alternative, assuming that he does not purchase additional shares. Do not round intermediate calculations. Round your answers to the nearest whole number.

   	Original	Plan 1	Plan 2	Plan 3
   Number of shares
   Total shares
   Percent ownership	%	%	%	%

3. What is the effect on earnings per share of each alternative, assuming that profits before interest and taxes will be 20% of total assets? Do not round intermediate calculations. Round your answers to the nearest cent.

   Alternative 1	$
   Alternative 2	$
   Alternative 3	$

4. What will be the debt ratio (TL/TA) under each alternative? Do not round intermediate calculations. Round your answers to the nearest whole number.

   Alternative 1	%
   Alternative 2	%
   Alternative 3	%

Please help and show work.

Thank you