Long Term Liabilities: Bond and Notes

Three different plans for financing a $18,000,000 corporation are under consideration by its organizers. Under each of the following plans, the securities will be issued at their par or face demount and the income tax rate is estimated at 15% of income.

Plan 1 Plan 2 Plan 3

5% Bond ______ _______ $7,000,000

Preferred 4% stock, $40 par _______ $10,000,000 $7,000,000

Command Stock $10 par $18,000,000 $8,000,000 $4,000,000

Net Income $18,000,000 $8000,000 $18,000,000

a. Determine for each plan the earnings per share of common stock assuming that the income before bond interest and income tax is $1,4000,000.

b. Determine for each plan the earning per share of common stock, assuming that the income before bond interest and income tax is $1,000,000.

c. Discuss the advantages and the disadvantages of each plan.