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Determine the effect on net income

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

1. Issue 84,900 shares of common stock at $30 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 $2,547,000.

It is estimated that the company will earn $780,000 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 40% and has 108,500 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.

Reference no: EM132608757

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