E11-9 Northeast Airlines is considering two alternatives for the financing of a purchase of a

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E11-9 Northeast Airlines is considering two alternatives for the financing of a purchase of a

fleet of airplanes.These two alternatives are:

1. Issue 60,000 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 par 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 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.