Gilliland Airlines is considering two alternatives for the financing of a purchase of a fleet of airplanes. These two alternatives are:
1. Issue 88,500 shares of common stock at $30 per share. (Cash dividends have not been paid nor is the payment of any contemplated.)
2. Issue 6%, 10-year bonds at face value for $2,655,000
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Plan One Issue Stock
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Plan Two Issue Bonds
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Net income
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$
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$
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Earnings per share
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$
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It is estimated that the company will earn $771,000 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 40% and has 119,600 shares of common stock outstanding prior to the new financing.
Determine the effect on net income and earnings per share for these two methods of financing.