Question

Jardon Co. is considering the following alternative financing plans:

Plan 1 Plan 2

Issue 6% bonds (at face value) $6,000,000 $5,000,000

Issue preferred $3.00 stock, $30 par 0 $3,000,000

Issue common stock, $10 par $6,000,000 $4,000,000

Income tax is 40% of income.Determine the earnings per share of common stock, assuming income before bond interest and income tax is $1,200,000.

Answer 1

		Plan 1	Plan 2
	Earning Before interest and Taxes	12,00,000.00	12,00,000.00
	Less: Interest on Bonds	$            3,60,000.00	$          3,00,000.00
		(6,000,000 X 6%)	(5,000,000 X 6%)
	Net Income after interest	$                  8,40,000	$                9,00,000
	Less: Income tax @ 40%	$                  3,36,000	$                3,60,000
	Net income after Tax	$            5,04,000.00	$          5,40,000.00
	Less: Preferred Dividend	$                               -	$              90,000.00
			(3,000,000 X 3%)
	Net Balance available for Common Shareholders (A)	5,04,000.00	4,50,000.00
	Number of shares Outstanding (B)	6,00,000	4,00,000
		(6,000,0000/ $10)	(4,000,0000/ $10)
	Earning Per Share (Net balance available for Common Shareholders / Number of Shares Outstanding) (A/B)	$                          0.84	$                         1.13
	Note: Please cheque the preferred rate of interest not properly shown in question. I taken at 3% please Comment
	if the interest on predferred stock is changed)