Effect of financing on earnings per share

The organizers are considering three different plans to finance an $8,300,000 corporation. Under each of the following plans, the securities will be issued at face or face value, and the income tax rate is estimated at 40% of the income:

		Plano 1		Plano 2		plano 3
10% Bonuses		_		_		$4,150,000
5% Preferred Stock $80 Par		_		$4,150,000		2,075,000
Common shares, $8.3 at par		$8,300,000		4,150,000		2,075,000
	Total	$ 8,300,000		$ 8,300,000		$ 8,300,000

Required:

1. Determine earnings per common share for each plan, assuming income before bond interest and income tax is $16,600,000. Enter answers in dollars and cents, rounding to two decimal places.

	Earnings Per Share on Common Stock
Plano 1	$fill in the blank 1
Plano 2	fill in the blank 2
plano 3	fill in the blank 3

2. Determine earnings per common share for each plan, assuming income before bond interest and income tax is $7,885,000. Enter answers in dollars and cents, rounding to two decimal places.

	Earnings Per Share on Common Stock
Plano 1	$fill in the blank 4
Plano 2	fill in the blank 5
plano 3	fill in the blank 6

3. The principle of Plan 1 is that it involves only the issuance of common shares, that it does not require a periodic payment of interest or repayment of principal, and requires a payment of preferred dividends.

Answer rating: 100% (QA)

Firstly The Earnings Per Share EPS can be calculated by this formula EPS Net Income Preferred Dividend Number of Outstanding shares To calculate the n... View the full answer