Problems
134. Frontier City is trying to decide between the following two alternatives to finance its new $10 million roller coaster:
a. Issue $10 million of 6% bonds at face amount.
b. Issue one million shares of common stock for $10 per share.
Issue Bonds
Issue Stock
Operating income
$5,000,000
Interest expense (bonds only)
Income before tax
Income tax expense (30%)
Net income
$
# of shares
3,000,000
4,000,000
Earnings per share (Net income / # of shares)
Assuming bonds or shares of stock are issued at the beginning of the year, complete the income statement listed above for each alternative. Which alternative results in the highest earnings per share?
135. Valentino’s Pizza issues $40 million of 3% convertible bonds that mature in ten years. Each $1,000 bond is convertible into twenty-five shares of common stock. The current market price of Valentino’s stock is $35 per share.
1.Explain why Valentino’s might choose to issue convertible bonds.
2.Explain why investors might choose to purchase Valentino’s convertible bonds.
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