Question
In: Accounting
Effect of Financing on Earnings Per Share Three different plans for financing a $2,800,000 corporation are...
Effect of Financing on Earnings Per Share
Three different plans for financing a $2,800,000 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 | _ | _ | $1,400,000 | ||||
| Preferred 10% stock, $100 par | _ | $1,400,000 | 700,000 | ||||
| Common stock, $2.8 par | $2,800,000 | 1,400,000 | 700,000 | ||||
| Total | $2,800,000 | $2,800,000 | $2,800,000 | ||||
Round the answers to nearest cent.
Instructions:
1. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $5,600,000.
| Earnings per share of common stock | |
| Plan 1 | $ per share |
| Plan 2 | $ per share |
| Plan 3 | $ per share |
2. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $2,660,000.
| Earnings per share of common stock | |
| Plan 1 | $ per share |
| Plan 2 | $ per share |
| Plan 3 | $ per share |
3. Regarding the three plans, which of the
following statements is true?
Solutions
Expert Solution
1. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $5,600,000.
| Plan 1 | Plan 2 | Plan 3 | |
| Income before interest and tax | 5600000 | 5600000 | 5600000 |
| Less; Interest | 0 | 0 | 140000 |
| Income before tax | 5600000 | 5600000 | 5460000 |
| Less; Income tax | 2240000 | 2240000 | 2184000 |
| Net income | 3360000 | 3360000 | 3276000 |
| Preferred dividend | 0 | 140000 | 70000 |
| Income after preferred dividend | 3360000 | 3220000 | 3206000 |
| Share outstanding | 1000000 | 500000 | 250000 |
| EPS | 3.36 | 6.44 | 12.82 |
2. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $2660000
| Plan 1 | Plan 2 | Plan 3 | |
| Income before interest and tax | 2660000 | 2660000 | 2660000 |
| Less; Interest | 0 | 0 | 140000 |
| Income before tax | 2660000 | 2660000 | 2520000 |
| Less; Income tax | 1064000 | 1064000 | 1008000 |
| Net income | 1596000 | 1596000 | 1512000 |
| Preferred dividend | 0 | 140000 | 70000 |
| Income after preferred dividend | 1596000 | 1456000 | 1442000 |
| Share outstanding | 1000000 | 500000 | 250000 |
| EPS | 1.60 | 2.91 | 5.77 |
Note : For 3rd question there is not statement so how can i say which is true
ekkarill92 answered 2 years agoRelated Solutions
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