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Globla Airlines 60000

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E10-9 Global 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 $40 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 $2,400,000.

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.

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

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