Question

Sunland Company is considering these two alternatives for financing the purchase of a fleet of airplanes. 1. Issue 60,000 shares of common stock at $42 per share. (Cash dividends have not been paid nor is the payment of any contemplated.) 2. Issue 12%, 10-year bonds at face value for $2,520,000. It is estimated that the company will earn $819,000 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 30% and has 91,100 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 select an option $enter a dollar amount $enter a dollar amount select an option enter a dollar amount enter a dollar amount select an option enter a total of the two previous amounts enter a total of the two previous amounts select an option enter a dollar amount enter a dollar amount select an option $enter a total of the two previous amounts $enter a total of the two previous amounts select an option enter a number enter a number select an option $enter a dollar amount rounded to 2 decimal places $enter a dollar amount rounded to 2 decimal places

Answer 1

Issuing Stock Issuing Bonds

Net income $573,300 $361,620

Earnings per share $3.79 $3.97

Step-by-step explanation:

Calculation to determine the effect on net income and earnings per share for issuing stock and issuing bonds.

ISSUING STOCK ISSUING BONDS

Income before interest and taxes

$819,000 $819,000

Interest ($2,520,000 x 12%) $0 $302,400

Income before taxes $819,000 $516,600

($819,000-$302,400=$516,600)

Income tax expense (30%) $245,700 $154,980

(30%*$819,000=$245,700)

(30%*$516,600=$154,980)

NET INCOME $573,300 $361,620

($819,000-$245,700=$573,300)

($516,600-$154,980=$361,620)

Outstanding shares 151,100 91,100

(60,000shares+91,100 shares=151,100)

Earnings per share $3.79 $3.97

($573,300/151,100=$3.79)

($361,620/91,100=$3.97)

Therefore the effect on net income and earnings per share for issuing stock and issuing bonds are :

Issuing Stock Issuing Bonds

Net income $573,300 $361,620

Earnings per share $3.79 $3.97