Frey Co. is considering the following alternative financing plans:Plan 1Plan 2Issue 5% bonds (at face value)$6,000,000$2,000,000Issue preferred $1 stock, $20 parIssue common stock, $25 par6,000,0006,000,0004,000,000Income tax is estimated at 40% of income.Determine the earnings per share of common stock, assuming that income beforebond interest and income tax is $800,000.

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Asked Dec 19, 2019
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Frey Co. is considering the following alternative financing plans:
Plan 1
Plan 2
Issue 5% bonds (at face value)
$6,000,000
$2,000,000
Issue preferred $1 stock, $20 par
Issue common stock, $25 par
6,000,000
6,000,000
4,000,000
Income tax is estimated at 40% of income.
Determine the earnings per share of common stock, assuming that income before
bond interest and income tax is $800,000.
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Frey Co. is considering the following alternative financing plans: Plan 1 Plan 2 Issue 5% bonds (at face value) $6,000,000 $2,000,000 Issue preferred $1 stock, $20 par Issue common stock, $25 par 6,000,000 6,000,000 4,000,000 Income tax is estimated at 40% of income. Determine the earnings per share of common stock, assuming that income before bond interest and income tax is $800,000.

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Step 1

Calculations:

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Calculate interest on bonds for Plan 1. Interest expense = Face value of bonds x Rate of interest = $6,000,000 x 5% = $300,000 Calculate interest on bonds for Plan 2. Interest expense = Face value of bonds x Rate of interest = $2,000,000 x 5% = $100,000 Calculate the income tax expense for Plan 1. Income tax expense = ( Income before income tax x Income tax percentage) = $500,000 x 40% = $200,000 Calculate the income tax expense for Plan 2. Income tx expense=(Income before income tax x Income tax percentage) = $700,000 x 40% = $280,000 Calculate dividends on preferred stock for plan 2. Dividends on preferred stock = $6.000, 000 x $1 $20 par = $300,000

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Step 2
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Calculate interest on bonds for Plan 2. Interest expense = Face value of bonds x Rate of interest = $2,000,000 x 5% = $100,000 Calculate the income tax expense for Plan 1. Income tax expense=(Income before income tax x Income tax percentage) = $500,000 x 40% = $200,000 Calculate the income tax expense for Plan 2. Income tax expense = ( Income before income tax x Income tax percentage) = $700,000 x 40% = $280,000 Calculate dividends on preferred stock for plan 2. $6,000, 000 ×$1 Dividends on preferred stock $20 par = $300,000 Calculate the number of common stock outstanding for Plan 1. $6,000,000 Number of common stock outstanding $25 par = $240,000

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Step 3
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Calculate the number of common stock outstanding for Plan 2. $4, 000,000 Number of common stock outstanding $25 par = $160,000

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