Survey ofAccounting, 6th Edition, by Warren
P8-6 Effect offinancing on earnings per share
Three different plans for financing a $5,000,000 corporation areunder consideration by its organizers. Uner each of the followingplans, the securities will be issued at their par of face amount,and the income tax rate is estimated at 40% of income
Plan 1 Plan 2 Plan 3 8 % bonds -- -- $2,500,000 Preferred 4% stock, $100 par -- $2,500,000 1,250,000 Common stock, $5 par $5,000,000 2,500,000 1,250,000 Total $5,000,000 $5,000,000 $5,000,000
1. Determine for each plan the earnings per share of commonstock, assuming that the income beforebond interest and income taxis $1,000,000.
2. Determine for each plan the earnings per share of commonstock, assuming that the income before bond interest and income taxis $300,000.
3. Discuss the advantages and disadvantages of each plan.
Below is a template from my class...Please use this whenanswering.
1. Plan 1 Plan 2 Plan 3 Earnings before interest and income tax Deduct interest on bonds - - Income before income tax Deduct income tax Net income Dividends on preferred stock - Available for dividends on common stock Divide by shares of common stock outstanding Earnings per share on common stock $1.72 2. Plan 1 Plan 2 Plan 3 Earnings before interest and income tax Deduct interest on bonds Income before income tax Deduct income tax Net income Dividends on preferred stock Available for dividends on common stock Divide by shares of common stock outstanding Earnings per share on common stock
Survey ofAccounting, 6th Edition, by Warren
P8-6 Effect offinancing on earnings per share
Three different plans for financing a $5,000,000 corporation areunder consideration by its organizers. Uner each of the followingplans, the securities will be issued at their par of face amount,and the income tax rate is estimated at 40% of income
| Plan 1 | Plan 2 | Plan 3 | |
| 8 % bonds | -- | -- | $2,500,000 |
| Preferred 4% stock, $100 par | -- | $2,500,000 | 1,250,000 |
| Common stock, $5 par | $5,000,000 | 2,500,000 | 1,250,000 |
| Total | $5,000,000 | $5,000,000 | $5,000,000 |
1. Determine for each plan the earnings per share of commonstock, assuming that the income beforebond interest and income taxis $1,000,000.
2. Determine for each plan the earnings per share of commonstock, assuming that the income before bond interest and income taxis $300,000.
3. Discuss the advantages and disadvantages of each plan.
Below is a template from my class...Please use this whenanswering.
| 1. | Plan 1 | Plan 2 | Plan 3 | |||||
| Earnings before interest and income tax | ||||||||
| Deduct interest on bonds | - | - | ||||||
| Income before income tax | ||||||||
| Deduct income tax | ||||||||
| Net income | ||||||||
| Dividends on preferred stock | - | |||||||
| Available for dividends on common stock | ||||||||
| Divide by shares of common stock outstanding | ||||||||
| Earnings per share on common stock | $1.72 | |||||||
| 2. | Plan 1 | Plan 2 | Plan 3 | |||||
| Earnings before interest and income tax | ||||||||
| Deduct interest on bonds | ||||||||
| Income before income tax | ||||||||
| Deduct income tax | ||||||||
| Net income | ||||||||
| Dividends on preferred stock | ||||||||
| Available for dividends on common stock | ||||||||
| Divide by shares of common stock outstanding | ||||||||
| Earnings per share on common stock | ||||||||
Related questions
Three different plans for financing a $5,400,000 corporation areunder consideration by its organizers. Under each of the followingplans, the securities will be issued at their par or face amount,and the income tax rate is estimated at 40% of income.
| Plan 1 | Plan 2 | Plan 3 | |||||
| 10% bonds | _ | _ | $2,700,000 | ||||
| Preferred 10% stock, $40 par | _ | $2,700,000 | 1,350,000 | ||||
| Common stock, $5.40 par | $5,400,000 | 2,700,000 | 1,350,000 | ||||
| Total | $ 5,400,000 | $ 5,400,000 | $ 5,400,000 | ||||
1. Determinefor each plan the earnings per share of common stock, assuming thatthe income before bond interest and income tax is $10,800,000. Enter answers in dollarsand cents, rounding to the nearest cent.
2. Determinefor each plan the earnings per share of common stock, assuming thatthe income before bond interest and income tax is $5,130,000. Enteranswers in dollars and cents, rounding to the nearestcent.
3. Discuss the advantages and disadvantages of eachplan.
Three different plans for financing a $5,600,000 corporation areunder consideration by its organizers. Under each of the followingplans, the securities will be issued at their par or face amount,and the income tax rate is estimated at 40% of income.
| Plan 1 | Plan 2 | Plan 3 | |||||
| 10% bonds | _ | _ | $2,800,000 | ||||
| Preferred 5% stock, $80 par | _ | $2,800,000 | 1,400,000 | ||||
| Common stock, $5.60 par | $5,600,000 | 2,800,000 | 1,400,000 | ||||
| Total | $ 5,600,000 | $ 5,600,000 | $ 5,600,000 | ||||
Required:
1. Determine for each plan the earnings pershare of common stock, assuming that the income before bondinterest and income tax is $11,200,000. Enter answers in dollarsand cents, rounding to the nearest cent.
Plan 1
Plan 2
Plan 3
2. Determine for each plan the earnings pershare of common stock, assuming that the income before bondinterest and income tax is $5,320,000. Enter answers in dollars andcents, rounding to the nearest cent.
Plan 1
Plan 2
Plan 3
Effect of Financing on Earnings Per Share
Three different plans for financing an $6,300,000 corporationare under consideration by its organizers. Under each of thefollowing plans, the securities will be issued at their par or faceamount, and the income tax rate is estimated at 40% of income:
| Plan 1 | Plan 2 | Plan 3 | |||||
| 10% bonds | _ | _ | $3,150,000 | ||||
| Preferred 10% stock, $40 par | _ | $3,150,000 | 1,575,000 | ||||
| Common stock, $6.3 par | $6,300,000 | 3,150,000 | 1,575,000 | ||||
| Total | $ 6,300,000 | $ 6,300,000 | $ 6,300,000 | ||||
Required:
1. Determine the earnings per share of commonstock for each plan, assuming that the income before bond interestand income tax is $12,600,000. Enter answers in dollars and cents,rounding to the nearest cent.
| Earnings Per Share on Common Stock | |
| Plan 1 | $ 7.56 |
| Plan 2 | $ 14.49 |
| Plan 3 | $ |
2. Determine the earnings per share of commonstock for each plan, assuming that the income before bond interestand income tax is $5,985,000. Enter answers in dollars and cents,rounding to the nearest cent.
| Earnings Per Share on Common Stock | |
| Plan 1 | $ 3.59 |
| Plan 2 | $ 6.55 |
| Plan 3 | $ |
3. The principal advantage ofPlan 1 is that it involves only the issuance of common stock, whichdoes not require a periodic interest payment or return ofprincipal, and a payment of preferred dividends isnot required.
