Liquid Shipping Inc. has developed the following data to help in a decision on whether to issue $40 million in bonds or common shares. If bonds are issued the following projections are made: ROE is 19%, EPS is $2.50, Times interest earned is 3, and the leverage ratio is 40%. If shares are issued, ROE is 11%, EPS is $1.30, Times interest earned is 5, and the leverage ratio is 22%. What is the best conclusion to make concerning this data?

Question

Quizplus · Accepted Answer

Based on the given data, if bonds are issued, the ROE (return on equity) is higher at 19% compared to 11% if shares are issued. Additionally, the EPS (earnings per share) is also higher at $2.50 compared to $1.30 for shares. The times interest earned ratio is also higher for bonds at 3, indicating better ability to meet interest expenses. The leverage ratio is higher for bonds at 40%, but it is still within reasonable limits. Therefore, it can be concluded that issuing bonds would be the better option as the returns are larger than if the company issues shares.