Copyright

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

Question:

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

1. Issue 59,000 shares of common stock at $45 per share. (Cash dividends have not been paid nor is the payment of any contemplated.)

2. Issue 1396, 15-year bonds at face value for $2,655,000.

It is estimated that the company will earn $817,000 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 30% and has 98,500 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 The Earnings Per Share:

On a GAAP-compliant income statement, the Earnings Per Share is presented as the final line item at the very bottom of the statement. The Earnings Per Share reflects the amount of income attributable to each common share outstanding.

Answer and Explanation:

See below.

Option 1 2
Net income before interest and tax 817,000 817,000
Interest expense 0 2,655,000*0.13 = 345,150
Net income before tax 817,000 =817,000 -345,150=471,850
Net income =804,000 *(1-0.3) =$562,800 471,850*(1-0.3)=$330,295
Shares outstanding 98,500 +59,000 =157,500 98,500
Earnings per share 562,800/157,500=$3.57 330,295/98,500 =$3.35

Learn more about this topic:

Loading...
Calculating Earnings Per Share for Post-Retirement Benefits

from Accounting 202: Intermediate Accounting II

Chapter 9 / Lesson 4
288

Related to this Question

Explore our homework questions and answers library