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Which financing plan is better

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A firm needs $1.5 million of 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 earnings per share________

the common stock with an eps of $1.17, the convertible bond with an eps of $1.04, the common stock with an eps of $1.00, or the convertible bond with an eps of $1.00

please advise answer & why - thanks!

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Solution Summary

The solution explains how to select the long term financing - common stock or convertible bond

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The less dilution of EPS means higher EPS in the 2 options -

1. Equity Issue- Amount needed 1.5 million, issue price 15 we have to issue 100,000 new shares. The ...

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