Question

2 Required information The following information applies to the questions displayed below) Penny Arcades, Inc., is trying to decide between the following two alternatives to finance its new $35 million gaming center: a. Issue $35 million, 7% note. b. Issue 1 million shares of common stock for $35 per share. Required: 1. Assuming the note or shares of stock are issued at the beginning of the year, complete the income statement for each alternative. (Enter your answers in dollars, not millions. (.e., $5.5 million should be entered as 5,500,000). Round your "Earnings per Share" to 2 decimal places.) Issue Note Issue Stock $ 11,000,000 $ 11,000,000 2,450,000 0 $ 8,550,000 $ 11,000,000 Operating income Interest expense (note only) Income before tax Income tax expense (35%) Net Income Number of shares Earnings per share (Net income /# of shares) $ 8,550,000 $ 4,000,000 11,000,000 5,000,000

Answer 1

	Issue note	Issue stock
Operating income	$11,000,000	$11,000,000
Interest expense (Note only)	2,450,000	0
Income before tax	$8,550,000	$11,000,000
Income tax expense (35%)	-2,992,500	-3,850,000
Net income	$5,557,500	$7,150,000
Number of shares	4,000,000	5,000,000
earnings per share (Net income/Number of shares)	$1.39	$1.43