Question

Frey Co. is considering the following alternative financing plans:

	Plan 1		Plan 2
Issue 10% bonds (at face value)	$1,160,000		$580,000
Issue preferred $1 stock, $10 par	—		960,000
Issue common stock, $5 par	1,160,000		780,000

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 $348,000.

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

• Requirement asked, with calculations

		Plan 1	Plan 2
A	Net Income before interest and tax	$348,000	$348,000
B = Face value x 10%	Bond interest	$116,000	$58,000
C = A - B	Net Income before tax	$232,000	$290,000
D = C x 40%	Income tax expense	$92,800	$116,000
E = C - D	Net Income	$139,200	$174,000
F	Preferred dividend	$0	$96,000 [($960000 / $ 10) x $ 1]
G = E - F	Net Income for common stockholders	$139,200	$78,000
H = Common Stock $ / $ 5 par	Common Stock shares outstanding	232,000	156,000
I = G/H	Earnings per share = ANSWER	$                         0.60	$                                      0.50