# Alternative Financing PlansFrey Co. is considering the following alternative financing plans:Plan 1Plan 2960,000\$480,000ー800,000960,000 640,000Issue 10% bonds (at face value)Issue preferred \$1 stock, \$10 parIssue common stock, \$5 parIncome 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 two decimal places.Plan 1Plan 2Earnings per share on common stockEarnings per share on common stock

Question

I don't know how to solve this problem or which steps have to be taken to solve this. Thanks!

Step 1

Earnings per share on common stock means the earnings available for distribution to common stockholder after all expenses of the company have been incurred

Step 2
 Plan 1 Plan 2 \$ \$ Income from interest and taxes 480,000 480,000 Less. Bond interest 96,000 48,000 Profit before taxes 384,000 432,000 Less taxes @ 40% 153,600 172,800 Profit after tax 230,500 259,200 Less preference dividend 0 80,000 Income available to common stockholders 230,500 179,200 Number of Equity stockholders 192,000 128,000 EPS 1.20 1.40

Notes:

1. In plan 2, number of preference stock= \$800,000/10=80,000

So, the preference dividend @ \$1= \$80,000

1. Number of common stock shares in plan 1= \$960,000/5= 192,000

Number of common stock in plan 2= \$640,000.5 = 128,000

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