Bonds: Bonds are long-term promissory notes that are represented by a company while borrowing money from investors to raise fund for financing the operations. Common stock: It refers to a security issued in a form of certificate and implies the right of ownership of an investor over a portion of company’s earnings and assets. Earnings per Share: It is a portion of profit that is earned by each common stock. Formula: Earnings per share ( EPS ) = Net income − Preferred dividends Number of common shares outstanding To Determine: Earnings per share of common stock for each plan, if income before bond interest and income tax is $2,100,000.

Question

Effect of Financing on Earnings Per Share Three different plans for financing an $7,100,000 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 Preferred 10% stock, $40 par Common stock, $7.1 par Total Plan L Plan 2 Plan 3 Earnings Per Share on Common Stock 0.79 X 0.92 X $7.100,000 $7,100,000 Required: 1. Determine the samnings per ahara ot.common stack for each plan, assuming that the income before hond interest and income las is $14,200.000 Enter answers in dollars and cents, rounding to two decimal places. 3.72 $3,550,000 3,550,000 $7,100,000 $3,550,000 1,775,000 1,775,000 $7.100,000

Answer 1

Question

Chapter 14, Problem 14.1APR

1.

To determine

Bonds: Bonds are long-term promissory notes that are represented by a company while borrowing money from investors to raise fund for financing the operations.

Common stock: It refers to a security issued in a form of certificate and implies the right of ownership of an investor over a portion of company’s earnings and assets.

Earnings per Share: It is a portion of profit that is earned by each common stock.

Formula:

Earnings per share(EPS)=Net income −Preferred dividends Number of common shares outstanding

To Determine: Earnings per share of common stock for each plan, if income before bond interest and income tax is $2,100,000.

2.

To determine

Earnings per share of common stock for each plan, if income before bond interest and income tax is $1,050,000.

3.

To determine

To describe: The advantages and disadvantages of each plans.

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