Question

alternative financing plans
Frey Co. is considering the following alternative financing plans:
plan 1
issue 5% bonds(at faced value)$6,000,000
issue preferred $1 stock,$20 par --------
issued common stock, $25 par $6,000,000
plan 2
issue 5% bonds (at face value) $2,000,000
issue preferred $1 stock,$20 par 6,000,000
issue common stock,$25 par $4,000,000
income tax is estimated at 40% of income.
determine the earnings per share of common stock,assuming that income before bond interest and income tax is $800,000

Answer 1

Earnings per share (EPS) for

PLAN 1 = $1.25

PLAN 2 = $0.75

For calculations please check the attached image.

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