Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

EXERCISE 10-5

Purpose: (L.O. 4) This exercise will compare and contrast the effects of debt financing with the effects of stock financing.

The Siuda Specialty Corporation has the following items on its financial statements at December 31, 2014:

Assets	$1,000,000
Stockholders' equity	$1,000,000
Number of common stock shares outstanding	60,000

Management is considering two alternatives to finance the acquisition of $500,000 of new assets:

• (1) Issuance of 50,000 shares of $1 par value common stock at the market price of $10 per share.
• (2) Issuance of $500,000, 10% bonds at par.

The income tax rate is 30%.

Instructions

1. If income before interest and income taxes is estimated to be $180,000 in 2015, compute the projected earnings per share figure for 2015 for each alternative. (Round to the nearest cent.)
2. Explain the advantages that bonds offer over common stock to a corporation seeking long-term financing.