Question Details

Determine the effect on net income and earnings per share 


Ex. 1
United Health is considering two alternatives for the financing of some high technology medical equipment. These two alternatives are:

1.	Issue 50,000 ordinary shares with a $10 par value at $50 per share.
2.	Issue $2,500,000, 10%, 10-year bonds at par.

It is estimated that the company will earn $900,000 before interest and taxes as a result of acquiring the medical equipment. The company has an estimated tax rate of 30% and has 100,000 ordinary shares outstanding prior to the new financing.

Instructions
Determine the effect on net income and earnings per share for these two methods of financing.


Ex. 2
Three plans for financing a ¥20,000,000 corporation are under consideration by its organizers. Under each of the following plans, the securities will be issued at their par or face amount and the income tax rate is estimated at 30%.
	     Plan 1		     Plan 2		     Plan 3	
9% Bonds	—	—	¥10,000,000
6% Preference Shares, ¥100 par	—	¥10,000,000	5,000,000
Ordinary Shares, ¥10 par	¥20,000,000	  10,000,000	    5,000,000
Total	¥20,000,000	¥20,000,000	¥20,000,000

It is estimated that income before interest and taxes will be ¥5,000,000.

Instructions
Determine for each plan, the expected net income and the earnings per share.




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