Gilliland Airlines is considering two alternatives for the financing of a purchase of a fleetof airplanes. These two alternatives are:1) Issue 90,000 shares of common stock at $30 per share. (Cash dividendshave 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 generate $800,000 of income before interest andtaxes as a result of this purchase. The company has an estimated tax rate of 30% andhas 120,000 shares of common stock outstanding prior to the new financing.InstructionsDetermine the effect on net income and earnings per share for these two methods offinancing.Income before interest & taxesInterest expense ($2,700,000 × 10%)Income before taxesIncome Tax Expense (30%)Net IncomeOutstanding sharesEarnings per sharePlan 1 - IssueStock$ 800,000Plan 2 - IssueBonds$ 800,000

Earning per share refers to an amount being distributed out of profits among each shareholder…

Answered: Gilliland Airlines is considering two…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Cullumber Company is considering these two alternatives for financing the purchase of a fleet of airplanes. Issue 63,000 shares of common stock at $48 per share. (Cash dividends have not been paid nor is the payment of any contemplated.) Issue 13%, 15-year bonds at face value for $3,024,000. 1. 2 It is estimated that the company will earn $834,000 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 30% and has 94,100 shares of common stock outstanding prior to the new financing. Determine the effect on net income and earnings per share for issuing stock and issuing bonds. Assume the new shares or new bonds will be outstanding for the entire year. Start with Income Before Interest and Taxes. (Round earnings per share to 2 decimal places, e.g. $2.66. Start with Income Before Interest and Taxes.)
Seattle Adventures, Incorporated, is trying to decide between the following two alternatives to finance its new $17 million gaming center: a. Issue $17 million, 6% note. b. Issue 1 million shares of common stock for $17 per share with expected annual dividends of $1.02 per share. Required: 1. Assuming the note or shares of stock are issued at the beginning of the year, complete the income statement for each alternative. 2. Answer the following questions for the current year: (a) By how much are interest payments higher if issuing the note? (b) By how much are dividend payments higher by issuing stock? (c) Which alternative results in higher earnings per share?
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Midwest Airlines (MWA) is planning to expand its fleet of jets to replace some old planes and to expand its routes. It has received a proposal to purchase 112 small jets over the next 4 years. What annual net revenue must each jet produce to break even on its operating cost? The analysis should be done by finding the EUAC for the 10-year planned ownership period. MWA has a MARR of 12%, purchases the jet for $22 million, has operating and maintenance costs of $3.2 million the first year, increasing 8% per year, and performs a major maintenance upgrade costing $4.5M at end of Year 5. Assume the plane has a salvage value at end of Year 10 of $13 million.
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Cullumber Company is considering these two alternatives for financing the purchase of a fleet of airplanes. 1. Issue 63,000 shares of common stock at $48 per share. (Cash dividends have not been paid nor is the payment of any contemplated.) 2. Issue 13%, 15-year bonds at face value for $3,024,000. It is estimated that the company will earn $825,000 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 40% and has 94,100 shares of common stock outstanding prior to the new financing.Determine the effect on net income and earnings per share for issuing stock and issuing bonds. Assume the new shares or new bonds will be outstanding for the entire year. (Round earnings per share to 2 decimal places, e.g. $2.66.)

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