11.14 Exercise 11-14 Atlantic Airlines is considering these two alternatives for

Question

11.14

Exercise 11-14 Atlantic Airlines is considering these two alternatives for financing the purchase of a fleet of airplanes. 1. Issue 54,700 shares of common stock at $50 per share. (Cash dividends have not been paid nor is the payment of any contemplated.) 2, Issue 1590, 14-year bonds at face value for $2,735,000. It is estimated that the company will earn $820,600 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 30% and has 93,000 shares of common stock outstanding prior to the new francng. 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

Explanation / Answer

Particulars Plan 1 Issue Stock Plan 2 Issue Bonds Earnings before income and Taxes                   820,600.00                     820,600.00 Interest = 2,735,000*15%                                     -                       410,250.00 Earnings before Tax                   820,600.00                     410,350.00 Tax @30%                   246,180.00                     123,105.00 Earnings after Tax or Net Income                   574,420.00                     287,245.00 No of shares Plan 1 = 93000 + 54700 Plan 2 93000                   147,700.00                       93,000.00 Earnings per share = EAT/ No of shares                                3.89                                  3.09

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