A Firm Needs $1

Multiple Choice

A firm needs $1.5 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 $16 per share. To sell this new issue, the stock would have to be underpriced by $1 and sold for $15 per share. The firm currently has 600,000 shares of common stock outstanding. The alternative is to issue 30-year, 8 percent, and $1,000 par-value convertible bonds. The conversion price would be set at $20 per share, and the bond could be sold at par. The earnings for the firm are expected to be $700,000 in the coming year. Which plan results in less dilution of the earnings per share?

A) The common stock with an EPS of $1.17.
B) The convertible bond with an EPS of $1.04.
C) The common stock with an EPS of $1.00.
D) The convertible bond with an EPS of $1.00.