United Health is considering two alternatives for the financing of some high technology medical equipment

Accounting Mar 09, 2021

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.

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