Northeast Airlines is considering two alternatives for thefinancing of a purchase of a fleet of airplanes. These twoalternatives are:
1. Issue 62,000 shares of common stock at $46 per share. (Cashdividends have not been paid nor is the payment of anycontemplated).
2. Issue 13%, 10-year bonds at par for $2,852,000.
It is estimated that the company will earn $706,000 beforeinterest and taxes as a result of this purchase. The company has anestimated tax rate of 30% and has 83,100 shares of common stockoutstanding prior to the new financing.
Determine the effect on net income and earnings per share forthese two methods of financing.
Plan One
Issue Stock:
Plan Two
Issue Bonds:
Income before interest and taxes $ $
Interest
Income before income taxes
Income tax expense
Net income
Outstanding shares
Earnings per share
Northeast Airlines is considering two alternatives for thefinancing of a purchase of a fleet of airplanes. These twoalternatives are:
1. Issue 62,000 shares of common stock at $46 per share. (Cashdividends have not been paid nor is the payment of anycontemplated).
2. Issue 13%, 10-year bonds at par for $2,852,000.
It is estimated that the company will earn $706,000 beforeinterest and taxes as a result of this purchase. The company has anestimated tax rate of 30% and has 83,100 shares of common stockoutstanding prior to the new financing.
Determine the effect on net income and earnings per share forthese two methods of financing.
Plan One
Issue Stock:
Plan Two
Issue Bonds:
Income before interest and taxes $ $
Interest
Income before income taxes
Income tax expense
Net income
Outstanding shares
Earnings per share
Related questions
Alternative Financing Plans
Folmar Co. is considering the following alternative financingplans:
| Plan 1 | Plan 2 | |||
| Issue 10% bonds (at face value) | $1,400,000 | $700,000 | ||
| Issue preferred $1 stock, $10 par | â | 1,160,000 | ||
| Issue common stock, $5 par | 1,400,000 | 940,000 | ||
Income tax is estimated at 40% of income.
Determine the The profitability ratio of net income available tocommon shareholders to the number of common sharesoutstanding.earnings per share on common stock, assuming incomebefore A form of an interest-bearing note used by corporations toborrow on a long-term basis.bond interest and income tax is$1,120,000.
Enter answers in dollars and cents, rounding to the nearestcent.
| Plan 1 | $ Earnings per share on common stock |
| Plan 2 | $ Earnings per share on common stock |
Survey ofAccounting, 6th Edition, by Warren
P8-6 Effect offinancing on earnings per share
Three different plans for financing a $5,000,000 corporation areunder consideration by its organizers. Uner each of the followingplans, the securities will be issued at their par of face amount,and the income tax rate is estimated at 40% of income
| Plan 1 | Plan 2 | Plan 3 | |
| 8 % bonds | -- | -- | $2,500,000 |
| Preferred 4% stock, $100 par | -- | $2,500,000 | 1,250,000 |
| Common stock, $5 par | $5,000,000 | 2,500,000 | 1,250,000 |
| Total | $5,000,000 | $5,000,000 | $5,000,000 |
1. Determine for each plan the earnings per share of commonstock, assuming that the income beforebond interest and income taxis $1,000,000.
2. Determine for each plan the earnings per share of commonstock, assuming that the income before bond interest and income taxis $300,000.
3. Discuss the advantages and disadvantages of each plan.
Below is a template from my class...Please use this whenanswering.
| 1. | Plan 1 | Plan 2 | Plan 3 | |||||
| Earnings before interest and income tax | ||||||||
| Deduct interest on bonds | - | - | ||||||
| Income before income tax | ||||||||
| Deduct income tax | ||||||||
| Net income | ||||||||
| Dividends on preferred stock | - | |||||||
| Available for dividends on common stock | ||||||||
| Divide by shares of common stock outstanding | ||||||||
| Earnings per share on common stock | $1.72 | |||||||
| 2. | Plan 1 | Plan 2 | Plan 3 | |||||
| Earnings before interest and income tax | ||||||||
| Deduct interest on bonds | ||||||||
| Income before income tax | ||||||||
| Deduct income tax | ||||||||
| Net income | ||||||||
| Dividends on preferred stock | ||||||||
| Available for dividends on common stock | ||||||||
| Divide by shares of common stock outstanding | ||||||||
| Earnings per share on common stock | ||||||||
