Frontier City is trying to decide between the following two alternatives to fina

Question

Frontier City is trying to decide between the following two alternatives to finance its new $22 million roller coaster Issue $22 million of 6% bonds at face amount. Issue two million shares of common stock for $11 per share. Assuming bonds or shares of stock are issued at the beginning of the year, complete the income statement listed below for each alternative. (Enter your answers in dollars, not in millions. Round your "Earnings per Share" to 2 decimal places.) Which alternative results in the highest earnings per share? (Round your "Earnings per Share" to 2 decimal places.)

Explanation / Answer

Particulars Issue bonds Issue stocks Operating income 7000000 7000000 Interest Expense 1320000 0 Income before tax 5680000 7000000 Less: Tax expense 1704000 2100000 Income after tax 3976000 4900000 Number of shares 5000000 7000000 Earning per share 0.7952 0.7

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