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 $420,000.
Enter answers in dollars and cents, rounding to two decimal places.
| Plan 1 | $ Earnings per share on common stock |
| Plan 2 | $ Earnings per share on common stock |
Earnings per share on common stock under Plan 1
| Income before interest and taxes | 420,000 |
| Less:Interest (840,000*10%) | 84,000 |
| Income before taxes | 336,000 |
| Less: Income tax (336,000*40%) | 134,400 |
| Earnings available to common stockholders | 201,600 |
| Number of common shares (840,000/5) | 168000 |
| Earnings per share on common stock | $1.20 |
Earnings per share on common stock under Plan 2
| Income before interest and taxes | 420,000 |
| Less: interest (420,000*10%) | 42,000 |
| Income before taxes | 378,000 |
| Less : taxes (378,000*40%) | 151,200 |
| Earnings available to stockholders | 226,800 |
| Less: preference dividend (700,000/10*1) | 70,000 |
| Earnings available to common stockholders | 156800 |
| Number of common shares (560,000/5) | 112,000 |
| Earnings per share on common stock | $1.40 |
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