eTextbook and MediaSave for Later$$Plan OneIssue StockI$Plan TwoIssue BondsAttempts: unlimitedSubmit Answer Cullumber Company is considering these two alternatives for financing the purchase of a fleet of airplanes.Issue 63,000 shares of common stock at $48 per share. (Cash dividends have not been paid nor is the payment of anycontemplated.)Issue 13%, 15-year bonds at face value for $3,024,000.1.2It is estimated that the company will earn $834,000 before interest and taxes as a result of this purchase. The company has anestimated tax rate of 30% and has 94,100 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 bondswill be outstanding for the entire year. Start with Income Before Interest and Taxes. (Round earnings per share to 2 decimal places, e.g.$2.66. Start with Income Before Interest and Taxes.)

In the given problem, Earnings per share need to be determined under each circumstances. Earnings…

Answered: Cullumber Company is considering these…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 5P

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Cullumber Company is considering these two alternatives for financing the purchase of a fleet of airplanes. 1. Issue 63,000 shares of common stock at $48 per share. (Cash dividends have not been paid nor is the payment of any contemplated.) 2. Issue 13%, 15-year bonds at face value for $3,024,000. It is estimated that the company will earn $825,000 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 40% and has 94,100 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. (Round earnings per share to 2 decimal places, e.g. $2.66.)
Blossom Airlines is considering these two alternatives for financing the purchase of a fleet of airplanes. 1. 2. Issue 56,500 shares of common stock at $46 per share. (Cash dividends have not been paid, nor is the payment of any contemplated.) Issue 11%, 10-year bonds at face value for $2,599,000. It is estimated that the company will earn $821,000 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 30% and has 96,000 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. Start with Income Before Interest and Taxes. (Round earnings per share to 2 decimal places, e.g. $2.66. Start with Income Before Interest and Taxes.) Dividends Earnings Per Share Expenses Income Before Interest and Taxes Income Before Taxes Income Tax Expense Interest Expense Net Income / (Loss)…
Ivanhoe Company is considering these two alternatives for financing the purchase of a fleet of airplanes: 1. 2. Issue 52,500 shares of common stock at $44 per share. (Cash dividends have not been paid nor is the payment of any contemplated.) Issue 10%, 10-year bonds at face value for $2,310,000. It is estimated that the company will earn $809,200 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 30% and has 92,000 shares of common stock outstanding prior to the new financing. Determine the effect on net income and earnings per share for (a) issuing stock and (b) issuing bonds. Assume the new shares or new bonds will be outstanding for the entire year. (Round earnings per share to 2 decimal places, e.g. 2.66.) O î (a) Plan One Issue Stock $ (b) Plan Two Issue Bonds
Blossom Airlines is considering two alternatives for the financing of a purchase of a fleet of airplanes. These two alternatives are: 1. Issue 106,500 shares of common stock at $30 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 $3,195,000. It is estimated that the company will earn $798,000 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 30% and has 118,000 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. (Round earnings per share to 2 decimal places, e.g. 2.25.) Plan One Issue Stock Plan Two Issue Bonds Net income $ Earnings per share $
Oriole Airlines is considering two alternatives for the financing of a purchase of a fleet of airplanes. These two alternatives are: 1. Issue 81,300 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 $2,439,000. It is estimated that the company will earn $757,500 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 30% and has 106,500 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. (Round earnings per share to 2 decimal places, e.g. 2.25.) Plan One Issue Stock Plan Two Issue Bonds Net income $ $ Earnings per share $
Gilliland Airlines is considering two alternatives for the financing of a purchase of a fleet of airplanes. These two alternatives are: 1) Issue 90,000 shares of common stock at $30 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 generate $800,000 of income before interest and taxes as a result of this purchase. The company has an estimated tax rate of 30% and has 120,000 shares of common stock outstanding prior to the new financing. Instructions Determine the effect on net income and earnings per share for these two methods of financing. Income before interest & taxes Interest expense ($2,700,000 × 10%) Income before taxes Income Tax Expense (30%) Net Income Outstanding shares Earnings per share Plan 1 - Issue Stock $ 800,000 Plan 2 - Issue Bonds $ 800,000
PQR Corporation is considering the following alternative plans of financing for raising$4,000,000: The following additional information is available for PQR Corporation: Earnings before bond interest and income taxes (EBIT) are $9,000,000. The tax rate is 35%. All bonds or stocks are issued at their par values. Interest is payable at the end of each year. Required: Which plan should company choose & why (i.e. Explain the rationale behind selecting the plan)? Provide all the detailed calculations.
Carla Vista Inc. is considering two alternatives to finance its construction of a new $1.40 million plant. (a) Issuance of 140,000 shares of common stock at the market price of $10 per share. (b) Issuance of $1,400,000, 7% bonds at face value. Complete the following table. (Round earnings per share to 2 decimal places, e.g. 0.25.) Income before interest and taxes Interest expense from bonds Income before income taxes Income tax expense (40%) Net income Outstanding shares Earnings per share $ Indicate which alternative is preferable. Issue Stock $600,000 Net income is because of the additional shares of stock that are outstanding. $ V if stock is used. However, earnings per share is Issue Bond $600,000 460,000 V than earnings per share if bonds are used
EuropCar Rental is considering two alternatives for the financing of a purchase of a fleet of cars. These two alternatives are: Issue 60,000 shares of common stock at $45 per share. Issue 12%, 10-year bonds at face value for $2,500,000. It is estimated that the company will earn $750,000 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 30% and has 90,000 shares of common stock outstanding prior to the new financing. Instructions Determine the eﬀect on net income and earnings per share for these two methods of financing.
Kelly Corporation is considering the issuance of either debt or preferred stock to finance the purchase of a facility costing P1.5 million. The interest rate on the debt is 16 percent. Preferred stock has a dividend rate of 12 percent. The tax rate is 46 percent. REQUIREMENTS: 1. What is the annual interest payment? 2. What is the annual dividend payment? 3. What is the required income before interest and taxes to satisfy the dividend requirement??
Larkspur, Inc. is considering these two alternatives to finance its construction of a new $1.74 million plant: 1. 2. Issuance of 174,000 shares of common stock at the market price of $10 per share. Issuance of $1.74 million, 5% bonds at face value.
Supa Inc. is considering plans A and B for financing their new Systems project of OMR 6 million. Plan A involves issuance of 250,000 shares of common stock at the current market price of OMR 2 per share. Plan B involves issuance of OMR 5 million, 8% bonds at face value. Income before interest and taxes on the new plant will be OMR2.5million. Income taxes are expected to be 20%. Supa, Inc. currently has 100,000 shares of common stock outstanding. Advice Supa Inc. as to which plan would be better and why? (The answer should show clear steps and calculations).

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