Question

Effect of Financing on Earnings Per Share Three different plans for financing an $5,300,000 corporation are under consideration by its organizers. Under each of the following plans, the securities will be issued at their par or face amount, and the income tax rate is estimated at 40% of income: Plan 1 Plan 2 Plan 3 10% Bonds Preferred 5% stock, $80 par Common stock, $5.3 par $2,650,000 1,325,000 1,325,000 $2,650,000 2,650,000 $5,300,000 $5,300,000 $ 5,300,000 Total $5,300,000 Required: 1. Determine the earnings per share of common stock for each plan, assuming that the income before bond interest and income tax is $10,600,000. Enter answers in dollars and cents, rounding to two decimal places. Earnings Per Share on Common Stock Plan 1 plan 2 Plan 3 2. Determine the earnings per share of common stock for each plan, assuming that the income before bond interest and income tax is $5,035,000. Enter answers in dollars and cents, rounding to two decimal places Earnings Per Share on Common Stock Plan 1 Plan 2 Plan 3 3. The principal advantage of Plan 1 is that it involves only the issue of common stock, which does not require a periodic interest payment or return of principal, and a payment of preferred dividends is not

Answer 1

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AWSA (2) Plans plans Aboutin EPS on common stock $ 6436 $ 12:46 prand plan 2 Plan -3 $24.54 Wilkins calculation of EPS on common Stove : Planed Plan-2 Plan-3 loceme before bond Interest 10600000 10600000 10600000 and tanest Interest on bond @70% : - - (265000) profit before taxe : 10600000 10600000 10335000 tan @ yot. : 14240000) (4240000) 14134000) pocht after tape .: 6360000 6360,000 6201000 to preference Div® 54. : - (1325007 (66250) Cu prisfit for common Stoux 6360000 6227500 6 134750 lit) Number of common stock: 1000000 500000 250000 Eps (1/) : 6.36 12.46 24.54

(2) Plans Plan-1 Plan-2 Eps on Common stock $3.02 $ 5.78 $ 11:18 Plan-3 Plan-3 5035000 (265000) Workings: Calculation of EPS on common stoung : plan-l plan-2 y Income be force interest & tan : 5035000 5035006 Interest enpense : - - PBT 5035000 50 35000 * Tash @ you. ; (2014080) (2019000) PAT : 3021000 3 021000 you pref. Dividend : - (132500) 4770000 (1908000) 2862000 (66250) 2795750 Earning for common stock : 3021000 2888500 250000 TÜ) Number of common stock i 1000000 500000 Eps (1/3) : 3.02 5.78 11:18

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