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Ch. 13_BDC - stock the EPS of the company will drop to...

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Business Decision and Communication Problem Debbie Diamondback, I am writing you in response to the two methods of financing the store. With the issuance of stock, you would have to issue 50,000 shares to earn $500,000. 300,000 of the 500,000 total shares, or 60% of the company, are yours so you will still be the majority shareholders. However, this would create a scenario where large shareholders could become partial owners and have a say in the company. If the stock is sold for more than par value, than it would have an increase on the company’s retained earnings. Also, with the issuance of more stock, the EPS of the company will decrease. With issuing
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Unformatted text preview: stock, the EPS of the company will drop to $1.70. If you were to issue debenture bonds, not only would EPS be higher ($1.87), but you would still clearly be the majority holders of the company. Selling a 10% bond would also be safe, as it is the asking price on the market. In order to obtain $500,000 from selling bonds, the formula would look like this: i = 5% n = 40 p = 0.142 500,000 x 0.142 = $71,000 Therefore, in order to raise the $500,000 via bonds, you would only have to issue $71,000 worth of bonds. After 20 years of semi-annual compounding at 10%, you would have earned $500,000 in order to upgrade the company....
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