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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

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Alternative Financing Plans
Frey Co. is considering the following alternative financing plans:
Plan 1
Plan 2
960,000$480,000
ー800,000
960,000 640,000
Issue 10% bonds (at face value)
Issue preferred $1 stock, $10 par
Issue common stock, $5 par
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 two decimal places.
Plan 1
Plan 2
Earnings per share on common stock
Earnings per share on common stock
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Alternative Financing Plans Frey Co. is considering the following alternative financing plans: Plan 1 Plan 2 960,000$480,000 ー800,000 960,000 640,000 Issue 10% bonds (at face value) Issue preferred $1 stock, $10 par Issue common stock, $5 par 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 two decimal places. Plan 1 Plan 2 Earnings per share on common stock Earnings per share on common stock

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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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