Question

Alternative Financing Plans

Frey Co. is considering the following alternative financing plans:

	Plan 1		Plan 2
Issue 10% bonds (at face value)	$1,040,000		$520,000
Issue preferred $1 stock, $10 par	—		860,000
Issue common stock, $5 par	1,040,000		700,000

Income tax is estimated at 40% of income.

Determine the earnings per share on common stock, assuming that income before bond interest and income tax is $312,000.

Enter answers in dollars and cents, rounding to two decimal places.

Plan 1	$ Earnings per share on common stock
Plan 2	$ Earnings per share on common stock

Answer 1

	Plan 1	Plan 2
Income before bond interest and income tax	312000	312000
Less:Bond interest expense	104000	52000
Income before income tax	208000	260000
Less: Income tax expense 40%	83200	104000
Net income	124800	156000
Less: Preferred Dividends	0	86000
Net income for Common Stockholders	124800	70000
Divide by Outstanding common shares	208000	140000
Earnings per share on common stock	0.60	0.50
Workings:
	Plan 1	Plan 2
Outstanding common shares	=1040000/5	=700000/5