Question

Frey Co. is considering the following alternative financing plans

Plan 1		Plan 2
Issue 10% bonds (at face value)	$840,000		$420,000
Issue preferred $1 stock, $10 par	—		700,000
Issue common stock, $5 par	840,000		560,000

Income tax is estimated at 40% of income.

Determine the earnings per share on common stock, assuming that income before bond interest and income tax is $336,000.

Enter answers in dollars and cents, rounding to the nearest cent.

Plan 1	$ Earnings per share on common stock
Plan 2	$ Earnings per share on common stock

Answer 1

Particulars	Plan 1	Plan 2
Income before Interest & Tax	336,000	336,000
less: Interest on Bonds	84000	42000
Income before Tax	252,000	294,000
less: Tax @ 40%	100800	117600
Income After Tax	151,200	176,400
less: Dividend on Preferred Stock	0	70,000
Income available for common stock holders	151,200	106,400
No. of Common Stock Holder	168000	112000
Earning Per share on Common Stock	0.900	0.950

Working notes for the above answer is as under