Homework SourseQuantitative Reasoning Problem 3 ACC 122 Assignment is to be
Quantitative Reasoning Problem 3
ACC 122
Assignment is to be completed as a Word Document, PDF, or on notebook paper and submitted through Moodle
Compare two alternatives for financing - Issuance of common stock vs. Issuance of bonds.
Northeast Airlines is considering two alternatives for the financing of the purchase of a fleet of airplanes. These two alternatives are:
Issue 60000 shares of common stock at $45 per share. (Cash dividends have 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 earn $800,000 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 30% and has 90000 shares of common stock outstanding prior to the new financing.
Instructions:
How much capital is Northeast Airlines considering raising?
Determine the effect on net income and earnings per share for both of these methods of financing.
Which alternative would you recommend?
Why?
Show calculations as well as explain in words your thinking behind your calculations and conclusions.
Quantitative Reasoning Problem 3
ACC 122
Assignment is to be completed as a Word Document, PDF, or on notebook paper and submitted through Moodle
Compare two alternatives for financing - Issuance of common stock vs. Issuance of bonds.
Northeast Airlines is considering two alternatives for the financing of the purchase of a fleet of airplanes. These two alternatives are:
Issue 60000 shares of common stock at $45 per share. (Cash dividends have 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 earn $800,000 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 30% and has 90000 shares of common stock outstanding prior to the new financing.
Instructions:
How much capital is Northeast Airlines considering raising?
Determine the effect on net income and earnings per share for both of these methods of financing.
Which alternative would you recommend?
Why?
Show calculations as well as explain in words your thinking behind your calculations and conclusions.
Quantitative Reasoning Problem 3
ACC 122
Assignment is to be completed as a Word Document, PDF, or on notebook paper and submitted through Moodle
Compare two alternatives for financing - Issuance of common stock vs. Issuance of bonds.
Northeast Airlines is considering two alternatives for the financing of the purchase of a fleet of airplanes. These two alternatives are:
Issue 60000 shares of common stock at $45 per share. (Cash dividends have 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 earn $800,000 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 30% and has 90000 shares of common stock outstanding prior to the new financing.
Instructions:
How much capital is Northeast Airlines considering raising?
Determine the effect on net income and earnings per share for both of these methods of financing.
Which alternative would you recommend?
Why?
Show calculations as well as explain in words your thinking behind your calculations and conclusions.
Solution
Q1 How much capital is Northeast Airlines considering raising? Ans $2,700,000 or 60000 shares x $45 Q2 Determine the effect on net income and earnings per share for both of these methods of financing. Ans Plan One Plan Two Issue Stock Issue Bonds Income before interest and taxes $ 800,000 $ 800,000 Interest ($2,700,000 X 10%) - 270,000 Income before taxes 800,000 530,000 Income tax expense (30%) 240,000 159,000 Net income 560,000 371,000 Outstanding shares 150,000 90,000 Earnings per share $ 3.73 $ 4.12 Q3 Which alternative would you recommend? Why? Ans We will recommend Plan two of bond financing, since it will increase Earning per share.
