Question

Alternative Financing Plans Frey Co. is considering the following alternative financing plans: Plan 1 Plan 2 $960,000 Issue 10% bonds (at face value) Issue preferred $1 stock, $10 par $480,000 800,000 Issue common stock, $5 par 960,000 640,000 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 $672,000. 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 Submit Answer Try Another Version Save and Exit You must finish your in-progress quiz take before you can Cengage Lerning Cenage Technical Support

Answer 1

Answers

• Question #1, with calculations

		Plan 1	Plan 2
A	Net Income before interest and tax	$672,000	$672,000
B = Face value x 10%	Bond interest	$96,000	$48,000
C = A - B	Net Income before tax	$576,000	$624,000
D = C x 40%	Income tax expense	$230,400	$249,600
E = C - D	Net Income	$345,600	$374,400
F	Preferred dividend	$0	$80,000
G = E - F	Net Income for common stockholders	$345,600	$294,400
H = Common Stock $ / $ 5 par	Common Stock shares outstanding	192,000	128,000
I = G/H	Earnings per share = ANSWER	$                         1.80	$                                      2.30

• Question #2 with calculations

		Plan 1	Plan 2
A	Net Income before interest and tax	$240,000	$240,000
B = Face value x 10%	Bond interest	$80,000	$40,000
C = A - B	Net Income before tax	$160,000	$200,000
D = C x 40%	Income tax expense	$64,000	$80,000
E = C - D	Net Income	$96,000	$120,000
F	Preferred dividend	$0	$66,000
G = E - F	Net Income for common stockholders	$96,000	$54,000
H = Common Stock $ / $ 5 par	Common Stock shares outstanding	160,000	108,000
I = G/H	Earnings per share = ANSWER	$                         0.60	$                                      0.50