Effect of Financing on Earnings Per Share Three different plans for financing a $5,900,000 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. Plan 1 Plan 2 Plan 3 10% bonds _ _ $2,950,000 Preferred 10% stock, $100 par _ $2,950,000 1,475,000 Common stock, $4 par $5,900,000 2,950,000 1,475,000 Total $5,900,000 $5,900,000 $5,900,000 Round the answers to nearest cent. Instructions: 1. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $1,100,000. Earnings per share of common stock Plan 1 $fill in the blank 1 per share Plan 2 $fill in the blank 2 per share Plan 3 $fill in the blank 3 per share 2. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $715,000. Earnings per share of common stock Plan 1 $fill in the blank 4 per share Plan 2 $fill in the blank 5 per share Plan 3 $fill in the blank 6 per share 3. Complete the tables below regarding advantages and disadvantages of each plan. Plan 1 The advantage of Plan 1 is that The disadvantage is that its EPS is Plan 2 The advantage of Plan 2 is that The disadvantage is that its EPS is Plan 3 The advantage of Plan 3 is that The disadvantage is that its EPS is

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Effect of Financing on Earnings Per Share

Three different plans for financing a $5,900,000 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.

	Plan 1	Plan 2	Plan 3
10% bonds	_		_		$2,950,000
Preferred 10% stock, $100 par	_		$2,950,000		1,475,000
Common stock, $4 par	$5,900,000		2,950,000		1,475,000
	Total	$5,900,000		$5,900,000		$5,900,000

Round the answers to nearest cent.

Instructions:

1. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $1,100,000.

	Earnings per share of common stock
Plan 1	$fill in the blank 1 per share
Plan 2	$fill in the blank 2 per share
Plan 3	$fill in the blank 3 per share

2. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $715,000.

	Earnings per share of common stock
Plan 1	$fill in the blank 4 per share
Plan 2	$fill in the blank 5 per share
Plan 3	$fill in the blank 6 per share

3. Complete the tables below regarding advantages and disadvantages of each plan.

Plan 1

The advantage of Plan 1 is that

The disadvantage is that its EPS is

Plan 2

The advantage of Plan 2 is that

The disadvantage is that its EPS is

Plan 3

The advantage of Plan 3 is that

The disadvantage is that its EPS is

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