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:
|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|
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from Accounting 202: Intermediate Accounting IIChapter 9 / Lesson 4