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Effect of Financing on Earnings Per Share Three different plans for financing an $7,000,000 corporation are...
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Effect of Financing on Earnings Per Share
Three different plans for financing an $7,000,000 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 _ _ $3,500,000 Preferred 5% stock, $80 par _ $3,500,000 1,750,000 Common stock, $7 par $7,000,000 3,500,000 1,750,000 Total $ 7,000,000 $ 7,000,000 $ 7,000,000 Required:
1. Determine the earnings per share of common stock for each plan, assuming that the income before bond interest and income tax is $14,000,000. 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 $6,650,000. 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 of Plan 1 is that it involves only the issuance of common stock, which does not require a periodic interest payment or return of principal, and a payment of preferred dividends required.
Solutions
Expert Solution
1.
| Particulars | Plan 1 | Plan 2 | Plan 3 |
| EBIT | $ 14,000,000 | $ 14,000,000 | $ 14,000,000 |
| Less: Interest | $ 350,000 | ||
| EBT (EBIT - Interest) | $ 14,000,000 | $ 14,000,000 | $ 13,650,000 |
| Less: Taxes (40%) | $ 5,600,000 | $ 5,600,000 | $ 5,460,000 |
| Net Income | $ 8,400,000 | $ 8,400,000 | $ 8,190,000 |
| Less: Preferred Dividends | 0 | $ 175,000 | $ 87,500 |
| Earnings for Common Stock (Net Income - Pref Dividend) | $ 8,400,000 | $ 8,225,000 | $ 8,102,500 |
| Number of Shares (Common Stock /$7) | 1,000,000 | 500,000 | 250,000 |
| EPS (Earnings/ Common Stock) | $ 8.40 | $ 16.45 | $ 32.41 |
2.
| Particulars | Plan 1 | Plan 2 | Plan 3 |
| EBIT | $ 6,650,000 | $ 6,650,000 | $ 6,650,000 |
| Less: Interest | $ 350,000 | ||
| EBT (EBIT - Interest) | $ 6,650,000 | $ 6,650,000 | $ 6,300,000 |
| Less: Taxes (40%) | $ 2,660,000 | $ 2,660,000 | $ 2,520,000 |
| Net Income | $ 3,990,000 | $ 3,990,000 | $ 3,780,000 |
| Less: Preferred Dividends | 0 | $ 175,000 | $ 87,500 |
| Earnings for Common Stock (Net Income - Pref Dividend) | $ 3,990,000 | $ 3,815,000 | $ 3,692,500 |
| Number of Shares (Common Stock /$7) | 1,000,000 | 500,000 | 250,000 |
| EPS (Earnings/ Common Stock) | $3.99 | $7.63 | $14.77 |
3.
ekkarill92 answered 2 years agoRelated Solutions
Effect of Financing on Earnings Per Share Three different plans for financing a $7,000,000 corporation are...
Effect of Financing on Earnings Per Share
Three different plans for financing a $7,000,000 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
_
_
$3,500,000
Preferred 10% stock, $100 par
_
$3,500,000
1,750,000
Common stock, $7 par
$7,000,000
3,500,000
1,750,000
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$7,000,000
$7,000,000
$7,000,000
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Plan 1
Plan 2
Plan 3
10% Bonds
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_
$4,100,000
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2,050,000
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Plan 3
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Plan 1
Plan 2
Plan 3
10% bonds
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Plan 2
Plan 3
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1,575,000
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Plan 3
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Plan 3
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