Frontier City is trying to decide between the following two alternatives to finance its new $10 million roller coaster:
a.Issue $10 million of 6% bonds at face amount.
b.Issue one million shares of common stock for $10 per share.
Assuming bonds or shares of stock are issued at the beginning of the year,complete the income statement listed above for each alternative.Which alternative results in the highest earnings per share?
Definitions:
Constant Returns to Scale
A situation in production where increasing all inputs by a certain factor results in output increasing by the same factor.
Competitive Equilibrium
A market state where supply equals demand, resulting in an efficient distribution of goods and services without excess.
Price Ceiling
A government-imposed limit on the price charged for a product, intended to protect consumers from high prices.
Marginal Cost
The additional cost incurred in producing one more unit of a good or service.
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