Julian's Sports Equipment must decide whether to obtain $1,000,000 of financing by selling common stock at its current price of $40 per share or selling convertible bonds. The firm currently has 250,000 shares of common stock outstanding. Convertible bonds can be sold for their $1,000 par value and would be convertible at $45. The firm expects its earnings available to common stockholders to be $700,000 each year over the next several years.
(a) Calculate the number of shares the firm would need to sell to raise the $1,000,000.
(b) Calculate the earnings per share resulting from the sale of common stock.
(c) Calculate the number of shares outstanding once all bonds have been converted.
(d) Calculate the earnings per share associated with the bond financing after conversion.
(e) Which of the financing alternatives would you recommend the company adopt? Why?

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The Answer of Julian's Sports Equipment must decide whether to obtain $1,000,000 of financing by selling common stock at its current price of $40 per share or selling convertible bonds. The firm currently has 250,000 shares of common stock outstanding. Convertible bonds can be sold for their $1,000 par value and would be convertible at $45. The firm expects its earnings available to common stockholders to be $700,000 each year over the next several years.
(a) Calculate the number of shares the firm would need to sell to raise the $1,000,000.
(b) Calculate the earnings per share resulting from the sale of common stock.
(c) Calculate the number of shares outstanding once all bonds have been converted.
(d) Calculate the earnings per share associated with the bond financing after conversion.
(e) Which of the financing alternatives would you recommend the company adopt? Why?

Julian's Sports Equipment Must Decide Whether to Obtain $1,000,000 of Financing