Exercise 15-12

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

1.Issue100,800shares of common stock at $30per share. (Cash dividends have not been paid nor is the payment of any contemplated.)2.Issue9%, 10-year bonds at face value for $3,024,000.

It is estimated that the company will earn $729,500before interest and taxes as a result of this purchase. The company has an estimated tax rate of30% and has112,500shares 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

$