Question

Alternative Financing Plans

Frey Co. is considering the following alternative financing plans:

	Plan 1		Plan 2
Issue 10% bonds (at face value)	$1,000,000		$500,000
Issue preferred $1 stock, $10 par	—		830,000
Issue common stock, $5 par	1,000,000		670,000

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 $300,000.

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	$                                            0.60 per share
Plan 2	$                                            0.50 per share

--Workings

	Plan 1	Plan 2
Income before Interest and Tax	$300,000	$300,000
Less: Bond Interest	$100,000	$50,000
Income before income tax	$200,000	$250,000
Less: Income tax expense	$80,000	$100,000
Net Income	$120,000	$150,000
Less: Preferred Stock Dividend	$0	$83,000
Net Income for common stockholders	$120,000	$67,000
No. of common stock shares	200,000	134,000
Earnings per share	$                        0.60	$                                     0.50