A firm with earnings before interest and taxes of $500,000

A firm with earnings before interest and taxes of $500,000 needs $1 million of additional funds. If it issues debt, the bonds will mature after 20 years and have a coupon of 10 percent. The firm could issue a preferred stock with a dividend rate of 10 percent. The firm has 100,000 shares of common stock outstanding and is in the 30 percent corporate income tax bracket. What are the earnings per common share under the two alternative financings?


Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...
Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a...
Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...