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

1.Issue84,900shares 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 $2,547,000.

It is estimated that the company will earn $780,000before interest and taxes as a result of this purchase. The company has an estimated tax rate of40% and has108,500shares 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.