Penny Arcades, Incorporated, is trying to decide betwee alternatives to finance its new $35 million gaming center: a. Issue $35 million, 7% note. b. Issue 1 million shares of common stock for $35 per share with expected annual dividends of $2.45 per share. Required: 1. Assuming the note or shares of stock are issued at the beginning of the year, complete the income statement for each alternative. 2. Answer the following questions for the current year: (a) By how much are interest payments higher if issuing the note? (b) By how much are dividend payments higher by issuing stock? (c) Which alternative results in higher earnings per share?
Penny Arcades, Incorporated, is trying to decide betwee alternatives to finance its new $35 million gaming center: a. Issue $35 million, 7% note. b. Issue 1 million shares of common stock for $35 per share with expected annual dividends of $2.45 per share. Required: 1. Assuming the note or shares of stock are issued at the beginning of the year, complete the income statement for each alternative. 2. Answer the following questions for the current year: (a) By how much are interest payments higher if issuing the note? (b) By how much are dividend payments higher by issuing stock? (c) Which alternative results in higher earnings per share?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Penny Arcades, Incorporated, is trying to decide between the following two
alternatives to finance its new $35 million gaming center:
a. Issue $35 million, 7% note.
b. Issue 1 million shares of common stock for $35 per share with expected annual
dividends of $2.45 per share.
Required:
1. Assuming the note or shares of stock are issued at the beginning of the year,
complete the income statement for each alternative.
2. Answer the following questions for the current year:
(a) By how much are interest payments higher if issuing the note?
(b) By how much are dividend payments higher by issuing stock?
(c) Which alternative results in higher earnings per share?
Complete this question by entering your answers in the tabs below.
Required 1 Required 2
Assuming the note or shares of stock are issued at the beginning of the year, complete the
alternative. (Enter your answers in dollars, not millions (i.e., $5.5 million should be enterec
"Earnings per Share" to 2 decimal places.)
Operating income
Interest expense (on note only)
Income before tax
Income tax expense (25%)
Net income
Number of shares
Earnings per share (Net income / Number of shares)
Issue Note
Issue Stock
$ 11,000,000 $ 11,000,000
$
$
2,450,000
8,550,000 $ 11,000,000
2,992,500
3,850,000
4,000,000
0
1.39
5,000,000
1.43
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