Reference no: EM132585609

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:

Question 1. Complete the schedule below and calculate the earnings per share of common stock. 12%bonds Preferred stock Common stock Income before interest and income taxes $12,000,000$12,000,000$12,000,000 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

Question 2. Which financing option is most advantageous to the common stockholders? Why?