Question

Alternative Financing Plans

Frey Co. is considering the following alternative financing plans:

	Plan 1		Plan 2
Issue 10% bonds (at face value)	$1,200,000		$600,000
Issue preferred $1 stock, $10 par	—		1,000,000
Issue common stock, $5 par	1,200,000		800,000

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 $480,000.

Enter answers in dollars and cents, rounding to the nearest cent.

Plan 1	$________ Earnings per share on common stock
Plan 2	$________ Earnings per share on common stock

Answer 1

	Plan 1	Plan 2
Income before bond interest and income taxes	$                     4,80,000	$                         4,80,000
Less: Interest on bonds @ 10%	$                     1,20,000	$                            60,000
	($ 1,200,000 X 10% )	($ 600,000 X 10% )
Net income after interest	$                     3,60,000	$                         4,20,000
Less: Income taxes @ 40%	$                     1,44,000	$                         1,68,000
Income After Taxes	$                     2,16,000	$                         2,52,000
Less: Preferred Dividends	$                                  -	$                         1,00,000
Earning available for Common Shareholders	$                     2,16,000	$                         1,52,000
Divide By	"/" By	"/" By
Number of Shareholders	2,40,000	1,60,000
	($ 1,200,000 /$ 5)	($ 800,000 /$ 5)
Earning per shares	$                             0.90	$                                 0.95
Answer 1)
Plan 1 : $ 0.90 Earning per share on Common Stock
Plan 2 : $ 0.95 Earning per share on Common Stock