Three different plans for financing an $8,400,000 corporation are under consideration by its organizers. Under each of...
Three different plans for financing an $8,400,000 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 | _ | _ | $4,200,000 | ||||
| Preferred 5% stock, $80 par | _ | $4,200,000 | 2,100,000 | ||||
| Common stock, $8.4 par | $8,400,000 | 4,200,000 | 2,100,000 | ||||
| Total | $ 8,400,000 | $ 8,400,000 | $ 8,400,000 | ||||
Required:
1. Determine the earnings per share of common stock for each plan, assuming that the income before bond interest and income tax is $16,800,000. Enter answers in dollars and cents, rounding to the nearest cent.
| 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 $7,980,000. Enter answers in dollars and cents, rounding to the nearest cent.
| Earnings Per Share on Common Stock | |
| Plan 1 | $ |
| Plan 2 | $ |
| Plan 3 | $ |
Homework Answers
Answer-1)-
| EARNING PER SHARE ON COMMON STOCK | |||
| Particluars | Plan 1 | Plan 2 | Plan 3 |
| $ | $ | $ | |
| Income before interest & taxes | 16800000 | 16800000 | 16800000 |
| Less:- Interest on bonds | 0 | 0 | 4200000*10%= 420000 |
| Income before taxes | 16800000 | 16800000 | 16380000 |
| Income Taxes 40% | 16800000*40%=6720000 | 16800000*40%= 6720000 | 16380000*40%= 6552000 |
| Income after taxes(A) | 10080000 | 10080000 | 9828000 |
| Less- Preferred dividends | 0 | 4200000*5%= 210000 | 2100000*5%= 105000 |
| Earning for common stockholders | 10080000 | 9870000 | 9723000 |
| No of shares (B) | 1000000 | 500000 | 250000 |
| Earning per share C=A/B | 13.81 | 20.16 | 38.89 |
2)-
| EARNING PER SHARE ON COMMON STOCK | |||
| Particluars | Plan 1 | Plan 2 | Plan 3 |
| $ | $ | $ | |
| Income before interest & taxes | 7980000 | 7980000 | 7980000 |
| Less:- Interest on bonds | 0 | 0 | 4200000*10%= 420000 |
| Income before taxes | 7980000 | 7980000 | 7560000 |
| Income Taxes 40% | 7980000*40%=3192000 | 7980000*40%= 3192000 | 7560000*40%= 3024000 |
| Income after taxes(A) | 4788000 | 4788000 | 4536000 |
| Less- Preferred dividends | 0 | 4200000*5%= 210000 | 2100000*5%= 105000 |
| Earning for common stockholders | 4788000 | 4578000 | 4431000 |
| No of shares (B) | 1000000 | 500000 | 250000 |
| Earning per share C=A/B | 6.56 | 9.58 | 17.72 |
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