Exercise 10-15 Gilliland Airlines is considering two alternatives for the financ

Question

Exercise 10-15 Gilliland Airlines is considering two alternatives for the financing of a purchase of a fleet of airplanes. These two alternatives are: Issue 94,500 shares of common stock at $30 per share. (Cash dividends have not been paid nor is the payment of any contemplated.) Issue 996, 10-year bonds at face value for $2,835,000. 1. 2. It is estimated that the company will earn $900,000 before interest and taxes as.a.result.of this purchase. The company has an estimated tax rate of 30% and has 105,000 shares of common stock outstanding prior to the new financing. Determine the effect on net income and earnings per share for these two methods of financing. (Round earnings per share to 2 decimal places, e.g. 2.25.) Plan One Issue Stock Plan Two Issue Bonds Net income Earnings per share

Explanation / Answer

S.No Particulars Plan one Issue Stock Plan Two Issue Bonds (a) Income before interest and taxes 900000 900000 (b) Less: Interest (2835000*9%) 255150 (c ) Income before taxes [(a) - (b)] 900000 644850 (d) Less: Income tax expenses [(c )*30%] 270000 193455 (e ) Net Income [(c ) - (d)] 630000 451395 (f) Outstanding Shares (105000+94500) 199500 105000 (g) Earnings per share [(e )/(f)] 3.16 4.30 Particulars Plan one Issue Stock Plan Two Issue Bonds Net Income 630000 451395 Earnings per share 3.16 4.30

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