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


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