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 120,000 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.

Question

Quizplus · Accepted Answer

The Answer of 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 120,000 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.

United Health Is Considering Two Alternatives for the Financing of Some