| Course | GB518 Financial Accounting Principles and Analysis |
|---|---|
| Unit | Unit 7 |
| Paper type | Debt versus equity analysis |
| Length | About 860 words, 6 pages double-spaced |
| Format | APA 7 student paper |
| School | Purdue University Global |
| Program | MBA |
| Updated | October 2026 |
Free sample paper for GB518 Unit 7
Bonds or Shares for a $12 Million Warehouse: A Unit 7 Debt Versus Equity Analysis for a Food Distributor
[Student Name]
Purdue University Global
GB518: Financial Accounting Principles and Analysis
Unit 7 Debt Versus Equity Analysis
[Instructor Name]
[Date]
The food distributor, its figures and both financing options are composite and illustrative; the sources cited are real.
The Situation
Carroway Foods distributes fresh and frozen food to restaurants, schools and hospitals across three states. It needs $12 million to build a cold-storage warehouse that will let it add frozen lines and cut third-party storage fees. Management expects operating income, earnings before interest and taxes, to rise from $9.0 million to $11.4 million once the warehouse is running.
The board is weighing two options. The first is ten-year bonds of $12 million at a 6.5 percent coupon. The second is 600,000 new common shares at the current market price of $20. Carroway now has $20 million of debt at 6 percent, 6.0 million shares outstanding, equity of $48 million, total assets of $80 million and a tax rate of 25 percent.
Pro Forma Statements
Balance sheet, liabilities and equity. Currently, debt is $20 million and equity $48 million. With bonds, debt rises to $32 million and equity stays at $48 million. With stock, debt stays at $20 million and equity rises to $60 million. Total assets rise to $92 million under either option.
Income statement at expected operating income of $11.4 million. With bonds, interest is $1.98 million, the existing $1.2 million plus $780,000 on the new bonds; pretax income is $9.42 million, tax $2.355 million and net income $7.065 million. With stock, interest stays at $1.2 million; pretax income is $10.2 million and net income $7.65 million.
Earnings per share. Currently, $5.85 million of net income over 6.0 million shares gives EPS of $0.975. With bonds, $7.065 million over 6.0 million shares gives $1.177. With stock, $7.65 million over 6.6 million shares gives $1.159.
Issued at par, the bonds would appear as a long-term liability of $12 million, with interest expense recorded each period as it accrues; issued shares would add $12 million to common stock and paid-in capital, with no expense at all (Kieso et al., 2022). Dividends on shares are a distribution of earnings, not a cost deducted before tax, which is why the stock option shows higher net income but spreads it over more shares.
Ratios
Debt to equity: currently 0.42; with bonds 0.67; with stock 0.33.
Debt to total assets: currently 0.25; with bonds 0.35; with stock 0.22.
Times interest earned: currently 7.5; with bonds 5.8; with stock 9.5.
Richard Brealey, Stewart Myers and Franklin Allen describe how debt magnifies the effect of operating income on earnings per share, raising returns to shareholders when the business does well and lowering them when it does poorly (Brealey et al., 2023).
The EPS Break-Even
EPS is equal under the two options when operating income minus $1.98 million, divided by 6.0 million shares, equals operating income minus $1.2 million, divided by 6.6 million shares, after tax on both. Solving gives operating income of about $9.78 million. Above that level, bonds produce higher EPS; below it, stock does.
Expected operating income of $11.4 million sits only about $1.6 million above the break-even, so the advantage of bonds is thin and disappears in a modest downturn.
A Downturn Scenario
If operating income fell by a third, to about $7.6 million, perhaps from losing a school district contract and higher fuel costs, EPS would be $0.703 with bonds and $0.727 with stock. Times interest earned would fall to 3.8 with bonds and 6.3 with stock. With bonds, Carroway would still cover its interest, but with much less cushion, and its lenders' covenants, which require coverage of at least 3.5, would be close to breached.
Weighing Return, Risk and Ownership
Return. Bonds give about 1.8 cents more EPS at expected operating income, an advantage of about 1.5 percent.
Risk. Bonds raise debt to equity to 0.67 and cut interest coverage to 5.8, leaving less room if the warehouse is slow to fill or the economy weakens. K. R. Subramanyam notes that lenders and rating agencies watch coverage ratios closely, and that a falling ratio can raise the cost of future borrowing (Subramanyam, 2014).
Ownership. Stock dilutes existing owners by 10 percent, from 6.0 to 6.6 million shares. Carroway's founding family holds 52 percent of the shares; after the issue, unless it buys new shares, its stake would fall to about 47 percent, below a majority.
Recommendation
Carroway should finance the warehouse with bonds, but only if it can keep times interest earned comfortably above its covenant. The EPS gain is small, but the ownership concern is decisive for the family, and expected operating income is above the break-even. To manage the risk, the board should issue bonds with a call feature and set a policy of repaying $2 million a year once the warehouse reaches full use. If the board doubts the forecast of $11.4 million, a mix, such as $8 million of bonds and $4 million of stock, would cut the risk while limiting dilution to about 3 percent.
References
Brealey, R. A., Myers, S. C., & Allen, F. (2023). Principles of corporate finance (14th ed.). McGraw Hill.
Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2022). Intermediate accounting (18th ed.). Wiley.
Subramanyam, K. R. (2014). Financial statement analysis (11th ed.). McGraw-Hill Education.
The Purdue Global GB518 Unit 7 instructions
GB518 Unit 7 asks you to compare financing a project with debt or with equity. State the amount needed, the expected operating income and both options' terms. Prepare pro forma statements in parallel columns, current, with debt and with equity, showing liabilities and equity and the income statement from operating income to earnings per share. Explain how each option is recorded. Compute debt to equity, debt to assets and times interest earned under each. Solve for the EPS break-even operating income, and rerun the figures in a downturn. Then weigh return, risk and ownership dilution, including covenant headroom and control, and recommend an option with any safeguards. Cite finance and accounting sources in APA 7.
How this GB518 Unit 7 example is built
The analysis states Carroway Foods' $12 million need, operating income rising from $9.0 million to $11.4 million, $20 million of existing debt, 6.0 million shares and $48 million of equity. Pro forma statements give net income of $7.065 million and EPS of $1.177 with bonds, and $7.65 million and $1.159 with stock, with Kieso, Weygandt and Warfield on how each is recorded. Ratios compare debt to equity of 0.67 and 0.33 and coverage of 5.8 and 9.5, citing Brealey, Myers and Allen on financial gearing. The break-even of about $9.78 million is solved, and the highlighted sentence places the forecast against it. A downturn to $7.6 million gives EPS of $0.703 and $0.727 and coverage of 3.8 and 6.3, near a 3.5 covenant, citing Subramanyam. The family's stake falling from 52 to 47 percent decides for callable bonds with repayment.
Reading the GB518 Unit 7 grading rubric
GB518 instructors grade this analysis on accurate pro forma statements and a reasoned trade-off. Each option's effect on interest, net income, shares and EPS should be correct. Showing how bonds and shares are recorded explains the income difference. Ratios should be computed under both options. Solving the EPS break-even and placing the forecast against it carries significant weight. A downturn scenario shows the writer has considered risk, and covenant headroom makes it concrete. Weighing ownership dilution and control shows awareness beyond EPS. A recommendation with safeguards earns credit. Brealey, Myers and Allen on financing choices, the Kieso text on recording debt and equity, and Subramanyam on coverage supply the APA 7 references.
GB518 Unit 7 help from the desk
Many GB518 Unit 7 analyses choose the option with higher EPS at expected income and stop. Others compute EPS correctly but ignore how much risk the debt adds. A common gap is the break-even: knowing the operating income at which the options tie shows how close the forecast is to reversing the choice. Some writers overlook dilution of control. Lay out both options in parallel, show how each is recorded, compute ratios and EPS, solve the break-even, test a downturn, weigh return, risk and ownership, and recommend with safeguards.
Get a GB518 Unit 7 example written to your instructions
The amounts, rates and share prices in your GB518 Unit 7 prompt drive a custom debt versus equity analysis. Pass them along with the instructions and rubric; in 24 to 48 hours a sample returns with pro forma columns, the EPS break-even and a downturn test. The first carries no charge. The paper above is an original model document written by our desk, not a submitted student paper and not an official Purdue University Global document.
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GB518 Unit 7 questions, answered
Why does debt usually raise earnings per share?
Because interest is a fixed, tax-deductible cost, while new shares split all future earnings among more owners. When the investment earns more than the after-tax cost of the debt, the extra profit goes to existing shareholders. When earnings fall, the fixed interest hurts more. That two-sided effect is what the downturn scenario in the GB518 example makes visible.
What is the EPS break-even point?
It is the level of operating income at which the debt and equity options produce the same earnings per share. Above it, debt gives higher EPS; below it, equity does. Setting the two EPS formulas equal and solving for operating income produces it. The figure turns a vague comparison into a threshold a board can weigh against expected income.
Does the analysis need to consider things beyond the numbers?
Yes, briefly. Ownership dilution, loss of control, loan covenants, flexibility for future borrowing and the signal each choice sends to investors all appear in strong GB518 papers. They belong after the quantitative comparison and should connect to it, for example noting that the covenant makes a second loan unlikely if the bond option is chosen.
Where can I find a free GB518 Unit 7 sample paper?
This page carries a full GB518 Unit 7 debt versus equity analysis for a food distributor's $12 million warehouse, with pro forma statements, ratios, an EPS break-even, a downturn test and APA 7 references.
What is the EPS break-even, and why does it matter?
It is the operating income at which bonds and shares produce equal earnings per share, about $9.78 million here. Expected income of $11.4 million is only modestly above it, so a downturn would reverse the advantage of debt.