Effect of Financing on Earnings Per Share
Three different plans for financing an $4,900,000 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:
10% Bonds
Preferred 10% stock, $40 par
Common stock, $4.9 par
Total
Plan 1
Plan 2
Plan 3
Earnings Per
Share on
Common Stock
Plan 1
$4,900,000
$4,900,000
Required:
1. Determine the earnings per share of common stock for each plan, assuming that the income before bond interest and income tax is $9,800,000. Enter answers in dollars and cents, rounding to two decimal
places.
Earnings Per
Share on
Plan 2
$2,450,000
2,450,000
$ 4,900,000
Plan 3
$2,450,000
1,225,000
1,225,000
$4,900,000
2. Determine the earnings per share of common stock for each plan, assuming that the income before bond interest and income tax is $4,655,000. Enter answers in dollars and cents, rounding to two decimal
places.
