Question

Alternative Financing Plans Frey Co. is considering the following alternative financing plans: Plan 1 Plan 2 Issue 10% bonds (at face value) $1,080,000 $540,000 Issue preferred $1 stock, $10 par- 900,000 Issue common stock, $5 par 1,080,000 720,000 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 $432,000. 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 interest and tax	432000	432000
Less: interest	108000	54000
Income before tax	324000	378000
Less: tax @40%	129600	151200
Net income	194400	226800
Less: preferred dividend		90000
Income available for common stockholders	194400	136800
No. Of common stock	216000	144000
Earnings per share	$0.90	$0.95