Collingwood Resorts Ltd (CRL) is planning to raise 10 million through a debt issue with these alternatives; 1.

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

Required: 

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

Capitalization (Financing) 

-8 % Convertible Debt

- Common Stock ($5 par value)    $5,000,000

- Contributed Capital                     10,000,000

- Retained Earnings                          15,000,000

Total        

                                                          30,000,000

# 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