Alternative Financing Plans Frey Co is considering the follo

Alternative Financing Plans

Frey Co. is considering the following alternative financing plans:

Income tax is estimated at 40% of income.

Determine the earnings per share on common stock, assuming that income before bond interest and income tax is $480,000.

Enter answers in dollars and cents, rounding to the nearest cent.

	Plan 1	Plan 2
Issue 10% bonds (at face value)	$1,200,000		$600,000
Issue preferred $1 stock, $10 par	—		1,000,000
Issue common stock, $5 par	1,200,000		800,000

Solution

Plan 1 Plan 2 Income before bond interest and income taxes $                     4,80,000 $                         4,80,000 Less: Interest on bonds @ 10% $                     1,20,000 $                            60,000 ($ 1,200,000 X 10% ) ($ 600,000 X 10% ) Net income after interest $                     3,60,000 $                         4,20,000 Less: Income taxes @ 40% $                     1,44,000 $                         1,68,000 Income After Taxes $                     2,16,000 $                         2,52,000 Less: Preferred Dividends $                                  -   $                         1,00,000 Earning available for Common Shareholders $                     2,16,000 $                         1,52,000 Divide By \"/\" By   \"/\" By   Number of Shareholders                         2,40,000                             1,60,000 ($ 1,200,000 /$ 5) ($ 800,000 /$ 5) Earning per shares $                             0.90 $                                 0.95 Answer 1) Plan 1 : $ 0.90 Earning per share on Common Stock Plan 2 : $ 0.95 Earning per share on Common Stock