Exercise - Global Airlines is considering two alternatives for the financing of a purchase of a fleet of airplanes. These two alternatives are:
1. Issue 64,125 shares of common stock at $40 per share. (Cash dividends have not been paid nor is the payment of any contemplated.)
2. Issue 9%, 10-year bonds at face value for $2,565,000.
It is estimated that the company will earn $752,000 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 30% and has 79,300 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.