Three different plans for financing an $2,100,000 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 1Plan 2Plan 310% Bonds_ _ $1,050,000 Preferred 5% stock, $80 par_ $1,050,000 525,000 Common stock, $2.1 par$2,100,000 1,050,000 525,000 Total$ 2,100,000 $ 2,100,000 $ 2,100,000 Required:1. Determine the earnings per share of common stock for each plan, assuming that the income before bond interest and income tax is $4,200,000. Enter answers in dollars and cents, rounding to two decimal places. Earnings Per Share on Common StockPlan 1$fill in the blank 1Plan 2 fill in the blank 2Plan 3 fill in the blank 32. Determine the earnings per share of common stock for each plan, assuming that the income before bond interest and income tax is $1,995,000. Enter answers in dollars and cents, rounding to two decimal places. Earnings Per Share on Common StockPlan 1$fill in the blank 4Plan 2 fill in the blank 5Plan 3 fill in the blank 63. The principal of Plan 1 is that it involves only the issuance of common stock, which does not require a periodic interest payment or return of principal, and a payment of preferred dividends required.

In this numerical has covered the concept of Earnings Per Share . Earning Per Share is a company's Net Profit divided by number of Common Share it has outstanding . EPS indicates how much money company earning for each of its stock. Solution to required (1):- Particulars Plan 1 Plan 2 Plan 3 Income before bond interest and income tax $4,200,000 $4,200,000 $4,200,000 Less:- Interest Nil Nil ($1,050,000*10%)105,000 Earning Before Tax (EBT) $4,200,000 $4,200,000 $4,095,000 Less:- Income Tax @40% on EBT $1,680,000 $1,680,000 1,638,000 Earnings After Tax (EAT) $2,520,000 $2,520,000 2,457,000 Less:- Preferred Dividend Nil $(1,050,000*5%)52,500 (525,000*5%)$26,250 Earning Available to Common Share Holder (A) $2,520,000 $2,467,500 $2,430,750 Number Of Common Share Outstanding (B) ($2,100,000/$2.1)1,000,000 (1,050,000/$2.1)=500,000 (525,000/$2.1)=250,000 Earning Per Share (A/B) $2.52 $4.93 $9.72 Solution to required (2):- Particulars Plan 1 Plan 2 Plan 3 Income before bond interest and income tax $1,995,000 $1,995,000 $1,995,000 Less:- Interest Nil Nil ($1,050,000*10%)105,000 Earning Before Tax (EBT) $1,995,000 $1,995,000 $1,890,000 Less:- Income Tax @40% on EBT $798,000 $798,000 $756,000 Earnings After Tax (EAT) $1,197,000 $1,197,000 $1,134,000 Less:- Preferred Dividend Nil $(1,050,000*5%)52,500 (525,000*5%)$26,250 Earning Available to Common Share Holder (A) $1,197,000 $1,144,500 $1,107,480 Number Of Common Share Outstanding (B) ($2,100,000/$2.1)1,000,000 (1,050,000/$2.1)=500,000 (525,000/$2.1)=250,000 Earning Per Share (A/B) $1.18 $2.29 $4.43

Answered: Three different plans for financing an…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

Three different plans for financing an $2,100,000 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	_		_		$1,050,000
Preferred 5% stock, $80 par	_		$1,050,000		525,000
Common stock, $2.1 par	$2,100,000		1,050,000		525,000
	Total	$ 2,100,000		$ 2,100,000		$ 2,100,000

Required:

1. Determine the earnings per share of common stock for each plan, assuming that the income before bond interest and income tax is $4,200,000. Enter answers in dollars and cents, rounding to two decimal places.

	Earnings Per Share on Common Stock
Plan 1	$fill in the blank 1
Plan 2	fill in the blank 2
Plan 3	fill in the blank 3

2. Determine the earnings per share of common stock for each plan, assuming that the income before bond interest and income tax is $1,995,000. Enter answers in dollars and cents, rounding to two decimal places.

	Earnings Per Share on Common Stock
Plan 1	$fill in the blank 4
Plan 2	fill in the blank 5
Plan 3	fill in the blank 6

3. The principal of Plan 1 is that it involves only the issuance of common stock, which does not require a periodic interest payment or return of principal, and a payment of preferred dividends required.

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