Penny Arcades, Inc., is trying to decide between the following two alternatives to finance its new $30 million gaming center: A. Issue $30 million of 5% bonds at face amount.
B. Issue 1 million shares of common stock for $30 per share.
1. Assuming bonds or shares of stock are issued at the beginning of the year, complete the income statement for each alternative.
Issue Bonds Issue stock
Operating income 10,500,0000 10,500,5000
Interest expense (bonds only)
Income before tax
Income tax expense (40%)
Net Income
Number of shares 3,500,0000 4,500,000
Earnings per share
2. Which alternative results in the highest earnings per share?