Exercise 11-14 Sandhill Co. is considering these two alternatives for financing

Question

Exercise 11-14 Sandhill Co. is considering these two alternatives for financing the purchase of a fleet of airplanes. 1. Issue 55,500 shares of common stock at $46 per share. (Cash dividends have not been paid nor is the payment of any contemplated.) 2. Issue 13%, 15-year bonds at face value for $2,553,000 It is estimated that the company will earn $810,000 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 40% and has 95,000 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

Explanation / Answer

Answer:-

Sandhill Co. Effect on net income $ earnings per share Particluars Plan A Plan B Issue Stock Issue Bonds $ $ Income before interest & taxes 810000 810000 Less:- Interest on bonds $2553000*13% 0 331890 Income before taxes 810000 478110 Income Taxes 30% 810000*30%=243000 478110*30% =143433 Income after taxes(A) 567000 334677 No of shares (B) 95000 Shares+55500 Shares (New issue)=150500 95000 Earning per share C=A/B 3.77 3.52

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