Question

Ulmer Company is considering the following alternative financing plans: Plan 1 Plan 2 Issue 6% bonds at face value $6,500,000 $4,250,000 Issue preferred stock, $20 par — 2,125,000 Issue common stock, $18par 3,000,000 2,125,000 Income tax is estimated at 35% of income. Dividends of $1 per share were declared and paid on the preferred stock. Determine the earnings per share of common stock, assuming income before bond interest and income tax is $1,000,000

Answer 1

Answer :

Calculation of Earnings for Common Stockholders :

Particulars	Plan 1 (in $)	Plan 2 (in $)
EBIT	1,000,000	1,000,000
Less : Bond Interest	390,000	255,000
	6,500,000 x 6%	4,250,000 x 6%
EBT	610,000	745,000
Less : Taxes @35%	213,500	260,750
Earning after tax	396,500	484,250
Less : Preferred dividend ($2,125,000 / $20 x $1)	106,250	106,250
Earnings available for common stock holders (A)	290,250	378,000
No. of Common stockholders (B)	166,667	118,056
	$3,000,000 / $18	$2,125,000 / $18
Earnings Per share (A / B)	1.74	3.20