(Answered) Exercise - global airlines is considering two alternatives

Accounting

Exercise - Global Airlines is considering two alternatives for the financing of a purchase of a fleet of airplanes. These two alternatives are:

1. Issue 64,125 shares of common stock at $40 per share. (Cash dividends have not been paid nor is the payment of any contemplated.)

2. Issue 9%, 10-year bonds at face value for $2,565,000.

It is estimated that the company will earn $752,000 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 30% and has 79,300 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.

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