Competition Bikes makes bicycles for the professional and accomplished riders who compete. The success of Competition Bikes products is also known in Canada with Canadian customer orders comprising about 10% of the company output. Because of this success, Competition Bikes is exploring the possibility of an expansion into Toronto, Canada.
Capital Structure Examining which capital acquisition methods will maximize shareholder return is an important step in exploring the possibility of expansion. Earnings before interest and tax were examined for each year using the approaches below. The total needs are expected to be $600,000.
Earnings per Common Stock Share 12% Bonds 50% Preferred (5%, $50 par) and 50% Common Stock 20% 12% Bonds and Common Stock 40% 12% Bonds and Common Stock 60% 12% Bonds and Common Stock
Year 9 0.002 0.027 0.027 0.023 0.017
Year 10 0.009 0.032 0.032 0.028 0.023
Year 11 0.019 0.039 0.038 0.035 0.031
Year 12 0.031 0.048 0.046 0.043 0.04
Year 13 0.042 0.057 0.054 0.052 0.049 0.103 0.203 0.197 0.181 0.16

Obtaining the funds by issuing common stock for 50% and preferred stock for 50% is the most lucrative and is the best option for Competition Bikes. There is no interest on bonds, because they aren’t being used. Net income is higher than the other methods. Preferred stockholders will find this investment attractive and will invest knowing that they will be paid before the common stockholders so there is less risk to them. Earnings per common stock share is higher with this approach that the other methods. Obtaining the funds needs by issuing 12% funds for 100% of the financing needs returns half of what the 50% preferred/50% common stock methodology over the 5 years. The interest paid on the bonds would be $72,000 a year, so income to the