Question

22. Wright Co. Inc. is considering the following plan for financing their company Issue 12% Bonds (at face value) Issue Preferred S2 Stock, SIO per share Issue Common Stock, $10 Par Plan $1,000,000 Plan 2 $500,000 $700.000 $800.000 $1.000.000 Income Tax is estimated at 40% of income. the earnings per share of common stock under the two alternative financing plans, assuming income before bond interest and income tax is $400,000 400,000 Earnings before bond interest and income tax Bond interest Balance Income tax Net income Dividends on preferred stock Earnings available for common stock Number of common shares Earnings per share on common stock ach of the following, identify whether it would be disclosed as an operating, financing, or investing

Answer 1

Solution Computation of Earning per share on Common stock a. Earnings before bond interest and income tax b. Bond interest (WN-1) C. Balance (a - b) d. Income tax (40%) (c * 40%) e. Net income (c-d) f. Dividends on preferred stock ($700,000 x $2/$10) Earnings available for common stock (e - f) h. Number of common shares (WN-2) i. Earnings per share on common stock (g/h) Plan 1 $400,000 $120,000 $280,000 $112,000 $168,000 $0 $ 168,000 $100,000 $1.68 Plan 2 $400,000 $ 60,000 $340,000 $ 136,000 $204,000 $140,000 $ 64,000 $80,000 $0.80 WN-1: Bond interest (a) Bonds payable (b) Interest rate (c) Bond interest (a*b) Plan 1 $1,000,000 12% $120,000 Plan 2 $500,000 12% $60,000 WN-2: Number of common shares (a) Common stock (b) Par value per share (c) Number of common shares (a/b) Plan 1 $1,000,000 $10 100,000 Plan 2 $800,000 $10 80,000