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 $17 million gaming center:

a.

Required informatin

Assuming bonds or shares of stock are issued at the beginning of the year, complete the income statement for each alternative. (Enter your answers in dollars not in millions. Round your "Earnings per Share" to 2 decimal places.)

-Issue bonds

-Issue stock

Penny Arcades, Inc., is trying to decide between the following two alternatives to finance its new $17 million gaming center:

a.

Issue $17 million of 6% bonds at face amount. b. Issue 1 million shares of common stock for $17 per share.

Explanation / Answer

Penny Arcades, Inc. All Amounts in $ 1. Income Statement Per Alternative Issue Issue Bonds Stock Operating Income 9200000 9200000 Interest Expense (on bonds) 1020000 Income before Tax 8180000 9200000 Income Tax Expense (30%) 2454000 2760000 Net Income 5726000 6440000 Number of Shares 2200000 3200000 Earnings Per Share (in $) 2.60 2.01 2. The issue of bonds results in the highest earnings per share of $ 2.60.

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