Problem #1 KKM Corporation discussed three different plans to finance $4,000,000 toward construction of a new warehouse. Under each of the following plans the securities will be issued at their par or face value amount, and the income tax rate is estimated at 25% of income. Plan#1 Plan#2 Plan#3 Preferred 10% stock $40 Par 2,000,000 Common stock $10 Par 4,000,000 2,000,000 1,000,000 10% Bonds 3,000,000 Total 4,000,000 4,000,000 4,000,000 Instructions: 1. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $800,000. 2. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $450,000. 3. Discuss the advantages and disadvantages of each plan.
Problem #1
KKM Corporation discussed three different plans to finance $4,000,000 toward construction of a new
warehouse. Under each of the following plans the securities will be issued at their par or face value
amount, and the income tax rate is estimated at 25% of income.
Plan#1 Plan#2 Plan#3
Common stock $10 Par 4,000,000 2,000,000 1,000,000
10% Bonds 3,000,000
Total 4,000,000 4,000,000 4,000,000
Instructions:
1. Determine for each plan the earnings per share of common stock, assuming that the income before
bond interest and income tax is $800,000.
2. Determine for each plan the earnings per share of common stock, assuming that the income before
bond interest and income tax is $450,000.
3. Discuss the advantages and disadvantages of each plan.
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 2 images
