A firm needs $5 million of new long-term financing. The firm is considering the sale of common stock or a convertible bond. The current market price of the common stock is $65 per share. To sell this new issue, the stock would have to be underpriced by $2 and sold for $63 per share. The firm currently has 600,000 shares of common stock outstanding. The alternative is to issue 20-year, 10 percent, and $1,000 par-value convertible bonds. The conversion price would be set at $73 per share, and the bond could be sold at par. The earnings for the firm are expected to be $4,000,000 in the coming year. Assuming the firm chooses the convertible bond, the earnings per share after all bonds are converted will be ______________.

Question

Quizplus · Accepted Answer

The correct answer is A.The earnings per share after all bonds are converted will be $5.98. This is calculated by dividing the earnings of $4,000,000 by the number of shares outstanding after conversion, which is 600,000 + (20,000 * 1000 / 73) = 821,918 shares.

A Firm Needs $5 Million of New Long-Term Financing