Atlantic Airlines is considering these two alternatives for financing the purcha
ID: 2477622 • Letter: A
Question
Atlantic Airlines is considering these two alternatives for financing the purchase of a fleet of airplanes.
It is estimated that the company will earn $808,200 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 40% and has 98,600 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.)
Plan One Issue Stock
Plan Two Issue Bonds
1. Issue 62,700 shares of common stock at $50 per share. (Cash dividends have not been paid nor is the payment of any contemplated.) 2. Issue 14%, 12-year bonds at face value for $3,135,000.Explanation / Answer
option 1 with equity issue option 2 with bond issue earnings 808200 808200 interest 3135000*14% 0 438900 Earning after interest before tax 808200 369300 tax 40% 323280 147720 earning after tax 484920 221580 no of equity shares 161300 161300 98600 EPS 3.00632362 2.247262
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