Northeast Airlines is considering two alternatives for the financing of a purchase of a fleet of airplanes.

Question:

Northeast 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 $45 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 $2,700,000.

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.

Instructions

Determine the effect on net income and earnings per share for these two methods of financing.

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...