Sorenson Co. is considering the following alternative plans for financing the company: Issue 10% bonds (at face) Issue $10 par common stock - $450,000 Plan 1 Plan 2 Issue 10$ par common stock - 300,000 450,000 150,000 Income tax is estimated of 40% of income. Determine the earnings per share of common stock under the two alternative financing plans, assuming income before bond interest and income tax is $114,000. Round your answers 2 Decimal pla

Sorenson Co. is considering the following alternative plans for financing the company: Issue 10% bonds (at face) Issue $10 par common stock - $450,000 Plan 1 Plan 2 Issue 10$ par common stock - 300,000 450,000 150,000 Income tax is estimated of 40% of income. Determine the earnings per share of common stock under the two alternative financing plans, assuming income before bond interest and income tax is $114,000. Round your answers 2 Decimal pla

Financial Accounting

14th Edition

ISBN:9781305088436

Author:Carl Warren, Jim Reeve, Jonathan Duchac

Publisher:Carl Warren, Jim Reeve, Jonathan Duchac

Chapter14: Long-term Liabilities: Bonds And Notes

Section: Chapter Questions

Problem 1PEA

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Sorenson Co. is considering the following alternative plans for financing the company: Plan 1 Plan 2 Issue 10% Bonds (at face) - $80,000 Issue $10 par Common Stock $120,000 $40,000 Income tax is estimated at 40% of income. Determine the earnings per share of common stock under the two alternative financing plans, assuming income before bond interest and income tax is $30,000. Round your answers to two decimal places.
Simonelli Co. is considering the following alternative financing plans: Plan 1 Plan 2 Issue 8% bonds (at face value) $5,000,000 4,000,000 Issue preferred $2.00 stock, $20 par — 2,000,000 Issue common stock, $25 par 5,000,000 4,000,000 Income tax is estimated at 40% of income. Determine the earnings per share of common stock, assuming income before bond interest and income tax is $1,000,000.
Fill in the table using the following information.Assets required for operation: $9,800Firm A uses only equity financingFirm B uses 30% debt with an 8% interest rate and 70% equityFirm C uses 50% debt with a 10% interest rate and 50% equityFirm D uses 50% preferred stock financing with a dividend rate of 10% and 50% equity financingEarnings before interest and taxes: $980If your answer is zero, enter "0". Round your answers for monetary values to the nearest cent. Round your answers for percentage values to one decimal place. A B C D Debt $ $ $ $ Preferred stock $ $ $ $ Common stock $ $ $ $ Earnings before interest and taxes $980.00 $980.00 $980.00 $980.00 Interest expense $ $ $ $ Earnings before taxes $ $ $ $ Taxes (40% of earnings) $ $ $ $ Preferred stock dividends $ $ $ $ Income available to common stockholders $ $ $ $…
The Severn Company plans to raise a net amount of$270 million to finance new equipment in early 2019. Two alternatives are being considered:Common stock may be sold to net $60 per share, or bonds yielding 12% may be issued.The balance sheet and income statement of the Severn Company prior to financing are asfollows: Assuming that EBIT equals 10% of sales, calculate earnings per share (EPS) under the debtfinancing and the stock financing alternatives at each possible sales level. Then calculateexpected EPS and σEPS under both debt and stock financing alternatives. Also calculate thedebt-to-capital ratio and the times-interest-earned (TIE) ratio at the expected sales levelunder each alternative. The old debt will remain outstanding. Which financing method doyou recommend? (Hint: Notes payable should be included in both the numerator and thedenominator of the debt-to-capital ratio.)
Binomial Tree Farm's financing includes $5 million of bank loans. Its common equity is shown in Binomial's Annual Report at $6.67 million. It has 500,000 shares of common stock outstanding, which trade on the Wichita Stock Exchange at $18 per share. What debt ratio should Binomial use to calculate its company cost of capital or asset beta? Note: Enter your answer as a percent rounded to 2 decimal places. Debt ratio %
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PQR Corporation is considering the following alternative plans of financing for raising$4,000,000: The following additional information is available for PQR Corporation: Earnings before bond interest and income taxes (EBIT) are $9,000,000. The tax rate is 35%. All bonds or stocks are issued at their par values. Interest is payable at the end of each year. Required: Which plan should company choose & why (i.e. Explain the rationale behind selecting the plan)? Provide all the detailed calculations.
The common stock of Etar Company currently sells for $32.50 per share. In an attempt to determine whether Etar Company is fairly priced, you have assembled the following information: - The before-tax required rates of return on Etar debt, preferred stock and common stock are, respectively, 7.0%, 6.8%, and 11.0%. - The company's target capital structure is 30% debt, 15% preferred stock, and 55% common stock. - The market value of the company's debt is $145 million, and its preferred stock is valued at $65 million. - Etar's FCFF for the year just ended is $32 million. FCFF is expected to grow at a constant rate of 5% for the foreseeable future. - The tax rate is 30%. - Etar has 7.5 million outstanding common shares. What is Etar's estimated common stock value per share? Group of answer choices $76.00 $98.55 $82.02 $55.82 $64.29
The company's capital structure is as follows Debt Weight 25%. Preferred Stock Weight 25% Common equity Weight 50%. The cost of debt is 12%6, the cost of preferred stock is 15% and the cost of common equity is 0.244 Calculate the companys weighted average Cost of tapital. Select one: Oa ob920 Ob.0.1895 Oc01520 Od All the given choices are not correct Oe 0.1595
A company currently has a bond outstanding that pays 6% coupon rate (coupons paid semiannually), a $1,000 par value and matures in 30 years. The bond is currently trading at $515.16. The company's tax rate is 25%. What is the firm's after-tax component cost of debt for purposes of calculating the weighted average cost of capital ("WACC")? Please show formulas, step by step instructions (without a financial calculator or Excel)
A firm's new financing will be in proportion to the market value of its current financing shown below. Carrying Amount($000 Omitted)Long-term debt $7,000Preferred stock (100,000 shares) 1,000Common stock (200,000 shares) 7,000 The firm's bonds are currently selling at 80% of par, generating a current market yield of 9%, and the corporation has a 40% tax rate. The preferred stock is selling at its par value and pays a 6% dividend. The common stock has a current market value of $40 and is expected to pay a $1.20 per share dividend this fiscal year. Dividend growth is expected to be 10%, per year, and flotation costs are negligible. The firm's weighted-average cost of capital is (round calculations to tenths of a percent)
Calculate the WACC using the following information: Debt-Equity ratio is 50%. Cost of debt is 8.00% Cost of equity is 10.00% Company pays tax at 35% a) 7.60% b) 8.40% c) 9.33% d) 9.00%