Collingwood Resorts Ltd (CRL) is planning to raise 10 million through a debt issue with these alternatives;
1. a 20 year, 8% convertible debenture issue with a $50 conversion price and $1,000 par value.
2. A 20-year,10% straight bond issue. Each $1,000 bond has a detachable warrant to purchase 20 shares for $50 a share.
The company has a 30% tax rate and its stock is currently selling at $40 per share. The firm’s earnings before interest and taxes are 20% of its capitalization which is currently is:
Common stock (par $5) $5,000,000
Contributed capital 10,000,000
Retained earnings 15,000,000
Total capitalization $30,000,000
Complete the attached schedule to answer the following
a)Show the capitalization resulting from each alternative immediately after the issue.
b) Assume that the conversion or the exercise of the warrants take place immediately after the issue in part (a). Show the capitalization resulting from each alternative after the conversion or exercise of the warrants.
c) Prepare partial pro forma profit and loss statements to show earnings per share under:
1) After the issue of the debt as in part (a) and
2) After the conversion or exercise of warrants as in part (b)
What differences do you observe in part (c)? Why?
Collingwood Resorts Ltd.
—————————–Debt Alternatives —————————–
Present Convertible Debt with Conversion Exercise of
Conditions debt warrants warrants
-8 % Convertible Debt
– Common Stock ($5 par value) $5,000,000
– Contributed Capital 10,000,000
– Retained Earnings 15,000,000
# of Common Shares 1,000,000
Net Operating Profit $6,000,000
Interest Expense 0
Profit Before Tax $6,000,000
Income Tax (30%) 1,800,000
Profit After Tax $4,200,000
Earnings per Share $4.20