1. EuropCar Rental is considering two alternatives for the financing of a purchase of a fleet of cars. These two alternatives are:

1. Issue 60,000 shares of common stock at $45 per share.

2. Issue 12%, 10-year bonds at face value for $2,500,000.

It is estimated that the company will earn $750,000 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 eect on net income and earnings per share for these two methods of financing.