Penny Arcades, Inc., is trying to decide between the following two alternatives

Question

Penny Arcades, Inc., is trying to decide between the following two alternatives to finance its new $29 million gaming center:

a.

Issue $29 million of 7% bonds at face amount.

b.

Issue 1 million shares of common stock for $29 per share.

ISSUE BONDS             ISSUE STOCK

Operating Income $10,400,000                   $10,400,000

Interest Expense(bonds only)
Income before tax
income tax expense (35%)
net income
number of shares $3,400,000                      $4,400,000
earning per share

2) Which alternative results in the highest earnings per share?

Issue bonds
or

Issue stock???

Penny Arcades, Inc., is trying to decide between the following two alternatives to finance its new $29 million gaming center:

Explanation / Answer

AMOUNT IN $ Issue bonds issue stock Operating income            10,400,000.00              10,400,000.00 interest              2,030,000.00                                      -   Profit before tax              8,370,000.00              10,400,000.00 tax              2,929,500.00                3,640,000.00 Profit after tax              5,440,500.00                6,760,000.00 NO. of equity 340000 1440000 EPS                             16.00                                 4.69 In issue of shares EPS is less so we should opt for issue of bonds for the highest EPS

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