Alternative Financing Plans
Folmar Co. is considering the following alternative financingplans:
Plan 1 Plan 2 Issue 10% bonds (at face value) $1,400,000 $700,000 Issue preferred $1 stock, $10 par â 1,160,000 Issue common stock, $5 par 1,400,000 940,000
Income tax is estimated at 40% of income.
Determine the The profitability ratio of net income available tocommon shareholders to the number of common sharesoutstanding.earnings per share on common stock, assuming incomebefore A form of an interest-bearing note used by corporations toborrow on a long-term basis.bond interest and income tax is$1,120,000.
Enter answers in dollars and cents, rounding to the nearestcent.
Plan 1 $ Earnings per share on common stock Plan 2 $ Earnings per share on common stock
Alternative Financing Plans
Folmar Co. is considering the following alternative financingplans:
| Plan 1 | Plan 2 | |||
| Issue 10% bonds (at face value) | $1,400,000 | $700,000 | ||
| Issue preferred $1 stock, $10 par | â | 1,160,000 | ||
| Issue common stock, $5 par | 1,400,000 | 940,000 | ||
Income tax is estimated at 40% of income.
Determine the The profitability ratio of net income available tocommon shareholders to the number of common sharesoutstanding.earnings per share on common stock, assuming incomebefore A form of an interest-bearing note used by corporations toborrow on a long-term basis.bond interest and income tax is$1,120,000.
Enter answers in dollars and cents, rounding to the nearestcent.
| Plan 1 | $ Earnings per share on common stock |
| Plan 2 | $ Earnings per share on common stock |
Related questions
Effect of Financing on Earnings Per Share
Three different plans for financing an $8,700,000 corporation are under consideration by its organizers. Under each of the following plans, 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 | _ | _ | $4,350,000 | ||||
| Preferred 5% stock, $80 par | _ | $4,350,000 | 2,175,000 | ||||
| Common stock, $8.7 par | $8,700,000 | 4,350,000 | 2,175,000 | ||||
| Total | $ 8,700,000 | $ 8,700,000 | $ 8,700,000 | ||||
Required:
1. Determine the earnings per share of common stock for each plan, assuming that the income before bond interest and income tax is $17,400,000. Enter answers in dollars and cents, rounding to the nearest cent.
| Earnings Per Share on Common Stock | |
| Plan 1 | $ |
| Plan 2 | $ |
| Plan 3 | $ |
2. Determine the earnings per share of common stock for each plan, assuming that the income before bond interest and income tax is $8,265,000. Enter answers in dollars and cents, rounding to the nearest cent.
| Earnings Per Share on Common Stock | |
| Plan 1 | $ |
| Plan 2 | $ |
| Plan 3 | $ |
Effect of Financing on Earnings Per Share
Three different plans for financing a $2,400,000 corporation are under consideration by its organizers. Under each of the following plans, 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 | _ | _ | $1,200,000 | ||||
| Preferred 10% stock, $40 par | _ | $1,200,000 | 600,000 | ||||
| Common stock, $2.4 par | $2,400,000 | 1,200,000 | 600,000 | ||||
| Total | $ 2,400,000 | $ 2,400,000 | $ 2,400,000 | ||||
Required:
1. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $4,800,000. Enter answers in dollars and cents, rounding to the nearest cent.
| Earnings Per Share on Common Stock | |
| Plan 1 | $ |
| Plan 2 | $ |
| Plan 3 | $ |
2. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $2,280,000. Enter answers in dollars and cents, rounding to the nearest cent.
| Earnings Per Share on Common Stock | |
| Plan 1 | $ |
| Plan 2 | $ |
| Plan 3 | $ |
3. The principal ______ of Plan 1 is that it involves only the issuance of common stock, which does not require a periodic interest payment or return of principal, and a payment of preferred dividends _____ required.
