Atlantic Airlines is considering these two alternatives for financing the purcha

Question

Atlantic Airlines is considering these two alternatives for financing the purchase of a fleet of airplanes. Issue 60,200 shares of common stock at $50 per share. (Cash dividends have not been paid nor is the payment of any contemplated.) Issue 15%, i s-vear bonds at face value for $3,010,000. It is estimated that the company will earn $827,500 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 30% and has 98,100 shares of common stock outstanding prior to the new financing. Determine the effect on net income and earnings per share for issuing stock and issuing bonds. Assume the new shares or new bonds will be outstanding for the entire year. (Round earnings per share to 2 decimal places, e.g. $2.66.)

Explanation / Answer

Plan one Issue Stock ,

Outstanding Share = common stock prior to the new financing *12/12 + New common stock Issued * 12/12

Outstanding Share = 98100*12/12 + 60200*12/12

Outstanding Share = 158300

Earning Per Share = Net Income/ Outstanding Share

Earning Per Share = 579250/158300

Earning Per Share = 3.66

Plan two Issue Bond ,

Outstanding Share = common stock prior to the new financing *12/12

Outstanding Share = 98100*12/12

Outstanding Share = 98100

Earning Per Share = Net Income/ Outstanding Share

Earning Per Share = 263200/98100

Earning Per Share = 2.68

Note : As mentioned in question that new share or new bond will be outstanding for entire year than the common stock prior to the new financing also outstanding for entire year

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