Your company must raise $1,100,000 for an upcoming project. There are three options to raise the necessary capital:

• Sell common stock at $11 per share
• Sell convertible bonds at 8% coupon, convertible into 80 shares of common stock for each $1000 bond.
• Sell bonds at 8% coupon, each $1000 bond carrying 100 warrants to buy common stock at $14 per share.

You own 75% of the common stock and you wish to maintain majority control. There are 180,000 shares outstanding. You currently have a bank loan of $275,000 with a 6% interest rate. One fourth of the funds that you raise will be used to pay down the bank loan and the other three fourths will be used to increase total assets for your expansion.

Your balance sheet and income statement are as follows:

Balance Sheet

Current liabilities $500,000

Common stock, par $1 $180,000

Retained Earnings $70,000

Total assets $750,000 Total Liabilities and Equity $750,000

Income Statement

Sales $2,000,000

Operating costs $1,500,000

EBIT $500,000

Interest expense $16,500

EBT $483,500

Taxes (40%) $193,400

NI $290,100

• Show the new balance sheet under each option. For options 2 and 3 show the balance sheet after conversion of the bonds or exercise of warrants.

• Show your control position under each alternative, assuming you do not purchase any additional shares.

• What is the effect on earnings per share for each option? EBIT is 20% of total assets.

• What is the debt ratio for each option (total debt over total assets)? SHOW WORK, WILL RATE!