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Ivanhoe Company is considering these two alternatives for financing the purchase of a fleet of...

Question:

Ivanhoe Company is considering these two alternatives for financing the purchase of a fleet of airplanes.

1. Issue 52,500 shares of common stock at $ 44 per share. (Cash dividends have not been paid nor is the payment of any contemplated.)
2. Issue 13%, 10-year bonds at face value for $ 2,310,000

It is estimated that the company will earn $ 804,000 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 40% and has 92,000 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.

What Is Earnings Per Share:

A company's Earnings Per Share is presented at the very bottom of the income statement. The Earnings Per Share for a period is the amount of net income that is attributable toe very single common share outstanding (weighted average).

Answer and Explanation:

See below.

Option 1 2
Net income before interest and tax 804,000 804,000
Interest expense 0 2,310,000 *0.13 = 300,300
Net income before tax 804,000 =804,000 -300,300 =503,700
Net income =804,000 *(1-0.4) =$482,400 503,700*(1-0.4)=$302,220
Shares outstanding 92,000 +52,500 =144,500 92,000
Earnings per share 482,400/144,500=$3.34 302,220/92,000 =$3.29

Learn more about this topic:

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How to Calculate Earnings Per Share: Definition & Formula

from Introduction to Business: Homework Help Resource

Chapter 24 / Lesson 14
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