Chapter 11 Assignment CP 11-2 Bagan Corporation, a profitable growth company with 200,000 shares of common stock outstanding, is in need of approximately $40 million in new funds to finance required expansion. Currently, there are no other equities outstanding. Management has three options open: a. Sell $40 million of 12-per cent bonds at face value. b. Sell shares of 10% preferred stock: 400,000 shares at $100 each (dividend $10 per share). c. Sell another 200,000 shares of common stock at $200 each. Operating income (before interest and income taxes) on completion of the expansion is expected to average $12 million per year; the income tax rate is 50%. Required: 1. Complete the schedule below and calculate the earnings per share of common stock. Preferred stock $12,000,000 $12,000,000 $12,000,000 12% Common bonds stock Income before interest and income taxes Less: Interest expense Income before taxes Less: Income taxes at 50% Net income Less: Preferred dividends Net income available to common stockholders Number of common shares outstanding Earnings per share of common stock 2. Which financing option is most advantageous to the common stockholders? Why?
Chapter 11 Assignment CP 11-2 Bagan Corporation, a profitable growth company with 200,000 shares of common stock outstanding, is in need of approximately $40 million in new funds to finance required expansion. Currently, there are no other equities outstanding. Management has three options open: a. Sell $40 million of 12-per cent bonds at face value. b. Sell shares of 10% preferred stock: 400,000 shares at $100 each (dividend $10 per share). c. Sell another 200,000 shares of common stock at $200 each. Operating income (before interest and income taxes) on completion of the expansion is expected to average $12 million per year; the income tax rate is 50%. Required: 1. Complete the schedule below and calculate the earnings per share of common stock. Preferred stock $12,000,000 $12,000,000 $12,000,000 12% Common bonds stock Income before interest and income taxes Less: Interest expense Income before taxes Less: Income taxes at 50% Net income Less: Preferred dividends Net income available to common stockholders Number of common shares outstanding Earnings per share of common stock 2. Which financing option is most advantageous to the common stockholders? Why?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question
a. Sell $40 million of 12-per cent bonds at face value
b. Sell shares of 10% preferred stock : 400,000 shares at $100 each (dividend $10 per share).
c. Sell another 200,000 shares of common stock at $200 each.
Required :
1. Complete the schedule below and calculate the earnings per share of common stock.
Transcribed Image Text:Chapter 11 Assignment
CP 11-2
Bagan Corporation, a profitable growth company with 200,000 shares
of common stock outstanding, is in need of approximately $40 million
in new funds to finance required expansion. Currently, there are no
other equities outstanding. Management has three options open:
a. Sell $40 million of 12-per cent bonds at face value.
b. Sell shares of 10% preferred stock: 400,000 shares at $100 each
(dividend $10 per share).
c. Sell another 200,000 shares of common stock at $200 each.
Operating income (before interest and income taxes) on completion of
the expansion is expected to average $12 million per year; the income
tax rate is 50%.
Required:
1. Complete the schedule below and calculate the earnings per share
of common stock.
12%
Preferred
stock
$12,000,000 $12,000,000 $12,000,000
Common
bonds
stock
Income before interest and income taxes
Less: Interest expense
Income before taxes
Less: Income taxes at 50%
Net income
Less: Preferred dividends
Net income available to common
stockholders
Number of common shares outstanding
Earnings per share of common stock
2. Which financing option is most advantageous to the common
stockholders? Why?
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