Assignment is to be completed as a Word Document, PDF, or on notebook paper and

Question

Assignment is to be completed as a Word Document, PDF, or on notebook paper and submitted through Moodle Compare two alternatives for financing Issuance of common stock vs. Issuance of bonds. Northeast Airlines is considering two alternatives for the financing of the purchase of a fleet of airplanes. These two alternatives are: 1. Issue 60000 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 90000 shares of common stock outstanding prior to the new financing. How much capital is Northeast Airlines considering raising? Determine the effect on net income and earnings per share for both of these methods of financing Which alternative would you recommend? Why? 1. 2. 3. 4. Show calculations as well as explain in words your thinking behind your calculations and conclusions

Explanation / Answer

Answer

60000 shares x $45 = $2,700,000
Bonds Value = $2,700,000

Effects are shown below—

If Stock Is issued

If Bonds are issued

Income before interest and taxes

$800000

$800000

(-) Interest on bonds

$270000

Income after interest

$800000

$530000

(-) Income taxes 30%

$240000

$159000

Income after tax (A)

$560000

$371000

No. of shares outstanding (B)

150000

90000

Earning per shares

$3.73

$4.12

--No pressure of compulsory interest payment and charge on Net Income.
--Dividend may or may not be declared/paid, hence cash outflow in control.
--More Net Income after taxes.
--Better Debt-Equity Ratio.

If Stock Is issued

If Bonds are issued

Income before interest and taxes

$800000

$800000

(-) Interest on bonds

$270000

Income after interest

$800000

$530000

(-) Income taxes 30%

$240000

$159000

Income after tax (A)

$560000

$371000

No. of shares outstanding (B)

150000

90000

Earning per shares

$3.73

$4.12

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