Problem #3: Arcade Company is trying to decide between the following two alternatives to finance its new $30 million gaming center: a Issue $30,000 7% note. b. Issue 2,000 shares of common stock for $15 per share. Issue Bonds Issue Stock Operating Income $11,000 $11,000 Interest expense (note only) Income before taX Income tax expense (35%) Net income Number of shares 40,000 Earnings per share (Net income/w of shares) Required: 1. Assuming the note or shares of stock are issued at the beginning of year, complete the above net income statement for each alternative (complete above schedule). 2. Which alternative results in the highest earnings per share (there are no preferred stock dividends)
Problem #3: Arcade Company is trying to decide between the following two alternatives to finance its new $30 million gaming center: a Issue $30,000 7% note. b. Issue 2,000 shares of common stock for $15 per share. Issue Bonds Issue Stock Operating Income $11,000 $11,000 Interest expense (note only) Income before taX Income tax expense (35%) Net income Number of shares 40,000 Earnings per share (Net income/w of shares) Required: 1. Assuming the note or shares of stock are issued at the beginning of year, complete the above net income statement for each alternative (complete above schedule). 2. Which alternative results in the highest earnings per share (there are no preferred stock dividends)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Problem #3:
Arcade Company is trying to decide between the following two alternatives to finance its new $30 million
gaming center:
a. Issue $30,000 7% note.
b. Issue 2,000 shares of common stock for $15 per share.
Issue Bonds
Issue Stock
Operating Income
$11,000
$11,000
Interest expense (note only)
Income before tax
Income tax expense (35%)
Net income
Number of shares
40,000
Earnings per share (Net income/# of shares)
Required:
1. Assuming the note or shares of stock are issued at the beginning of year, complete the above net
income statement for each alternative (complete above schedule).
2. Which alternative results in the highest earnings per share (there are no preferred stock dividends).
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