Question: Global Car Rental is considering two alternatives for the financing of a purchase of a fleet of cars. These two alternatives are: 1. Issue 60,000
Global Car Rental is considering two alternatives for the financing of a purchase of a fleet of cars. These two alternatives are:
1. Issue 60,000 ordinary shares at ¥40 per share. (Cash dividends have not been paid nor is the payment of any contemplated.)
2. Issue 7%, 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 ordinary shares outstanding prior to the new financing.
Instructions
Determine the effect on net income and earnings per share for these two methods of financing.
1. Issue 60,000 ordinary shares at ¥40 per share. (Cash dividends have not been paid nor is the payment of any contemplated.)
2. Issue 7%, 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 ordinary shares outstanding prior to the new financing.
Instructions
Determine the effect on net income and earnings per share for these two methods of financing.
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