Question

Crane Company is considering these two alternatives for financing the purchase of a fleet of airplanes.

1.		Issue 51,500 shares of common stock at $ 49 per share. (Cash dividends have not been paid nor is the payment of any contemplated.)
2.		Issue 14%, 15-year bonds at face value for $ 2,523,500.

It is estimated that the company will earn $ 802,000 before interest and taxes as a result of this purchase. The company has an estimated tax rate of 40% and has 91,000 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. (Round earnings per share to 2 decimal places, e.g. $2.66.)

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Plan One Issue Stock

Plan Two Issue Stock

Income Before Interest and Tax	802,000	820,000
Interest	0	353,290
Income Before Taxes	802,000
Income Tax Expense
Net Income/Loss
?????
Earnings Per Share

Answer 1

	Plan One Issue Stock	Plan Two Issue Bonds
Income before interest and taxes	802000	802000
Interest	0	353290
Income before taxes	802000	448710
Income tax expense	320800	179484
Net Income/Loss	481200	269226
Outstanding shares	142500	91000
Earnings per share	3.38	2.96
Workings:
Interest = 2523500*14%=$353290
Income tax expense :
Plan one = 802000*40%=$320800
Plan two = 448710*40%=$179484
Outstanding shares:
Plan one = 91000+51500 = 142500