Chap009

Chapter 9
Long-Term Liabilities

Compare financing alternatives (LO1)
E9–1 Penny Arcades, Inc., is trying to decide between the following two alternatives to finance its new $80 million gaming center:
a. Issue $80 million of 5% bonds at face amount.
b. Issue 2 million additional shares of common stock for $40 per share.

Issue Bonds
Issue Stock
Operating income
$12,000,000
$12,000,000
Interest expense (bonds only)

Income before tax

Income tax expense (35%)

Net income
$___________
$___________
Number of shares 2,000,000 4,000,000
Earnings per share (Net income/# of shares)

$

$

Required:
1. Assuming bonds or shares of stock are issued at the beginning of the year, complete the income statement for each alternative.
2. Which alternative results in the highest earnings per share?

Match bond terms with their definitions (LO2)
E9–2 Listed below are terms and definitions associated with bonds.
Terms

1. Term bond. 2. Serial bond. 3. Bond indenture. 4. Bond issue costs. 5. Callable bond. 6. Convertible bond. 7. Secured bond. 8. Unsecured bond.
Definitions
a. A contract between the issuer and the investor.
b. Matures on a single date.
c. Supported by specific assets pledged as collateral by the issuer.
d. Includes underwriting, legal, accounting, registration, and printing fees.
e. Allows the issuer to pay off the bonds early at a fixed price.
f. Matures in installments.
g. Secured only by the “full faith and credit” of the issuing corporation.
h. Allows the investor to transfer each bond into shares of common stock.

Required:
Match (by letter) the bond terms with their definitions. Each letter is used only once.

Calculate the issue price of bonds (LO3)
E9–3 On January 1, 2012, Frontier World issues $80 million of 6% bonds, due in 10 years, with interest payable semi-annually on June 30 and December 31 each