Question

Effect of Financing on Earnings Per Share

Three different plans for financing an $3,100,000 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		_		_		$1,550,000
Preferred 5% stock, $80 par		_		$1,550,000		775,000
Common stock, $3.1 par		$3,100,000		1,550,000		775,000
	Total	$ 3,100,000		$ 3,100,000		$ 3,100,000

Required:

1. Determine the earnings per share of common stock for each plan, assuming that the income before bond interest and income tax is $6,200,000. Enter answers in dollars and cents, rounding to the nearest cent.

	Earnings Per Share on Common Stock
Plan 1	$
Plan 2	$
Plan 3	$

2. Determine the earnings per share of common stock for each plan, assuming that the income before bond interest and income tax is $2,945,000. Enter answers in dollars and cents, rounding to the nearest cent.

	Earnings Per Share on Common Stock
Plan 1	$
Plan 2	$
Plan 3	$

3. The principal advantage 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 is not required.

Answer 1