ACC557 Week 6 Chapter 10 E10 9 E10 12 E10 15 P10 1A

EXERCISE 10-9

 

 

 

 

Plan One

Issue Stock

 

Plan Two

Issue Bonds

 

 

 

 

 

 

 

Income before interest and taxes

Interest ($2,400,000 X 10%)

Income before taxes

Income tax expense (30%)

Net income

Outstanding shares

Earnings per share

 

$800,000

         —     

 800,000

  240,000

$560,000

 150,000

   $3.73

 

$800,000

  240,000

 560,000

 168,000

$392,000

  90,000

   $4.36

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Exercise 10-9

 

Your answer is correct.

 

 

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

1.

 

Issue 60,000 shares of common stock at $40 per share. (Cash dividends have not been paid nor is the payment of any contemplated.)

2.

 

Issue 10%, 10-year bonds at face value for $2,400,000.

It is estimated that the company will earn $800,000 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 30% and has 90,000 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. (Round earnings per share to 2 decimal places, e.g. $2.25.)

 

 

Plan One Issue Stock

 

Plan Two Issue Bonds

Net income

 

$

 

$

Earnings per share

 

 

$

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Question Attempts: 2 of 3 used

 

 

 

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ACC557 Week 6 Chapter 10 (E10-9 E10-12 E10-15 P10-1A)

EXERCISE 10-9 Plan One Issue Stock Plan Two Issue Bonds Income before interest and taxes Interest ($2,400,000 X 10%) Income before taxes Income tax expense (30%) Net income Outstanding shares Earnings per share $800,000 —  800,000 240,000 $560,000  150,000    $3.73 $800,000 240,000  560,000  168,000 $392,...

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