Question
Asked Dec 20, 2019
18 views

Three different plans for financing an $18,000,000 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:

Please see  the attachment for details:

Instructions
1. Determine the earnings per share of common stock for each plan, assuming that the income before bond interest and income tax is $2,100,000.
2. Determine the earnings per share of common stock for each plan, assuming that the income before bond interest and income tax is $1,050,000.
3. Discuss the advantages and disadvantages of each plan.

Plan 1
Plan 2
Plan 3
$ 9,000,000
8% Bonds
Preferred 4% stock, $20 par
$ 9,000,000
4,500,000
Common stock, $10 par
$18,000,000
9,000,000
4,500,000
Total
$18,000,000
$18,000,000
$18,000,000
help_outline

Image Transcriptionclose

Plan 1 Plan 2 Plan 3 $ 9,000,000 8% Bonds Preferred 4% stock, $20 par $ 9,000,000 4,500,000 Common stock, $10 par $18,000,000 9,000,000 4,500,000 Total $18,000,000 $18,000,000 $18,000,000

fullscreen
check_circle

Expert Answer

Step 1

Part 1:

help_outline

Image Transcriptionclose

Determine Earnings per share of common stock. Particulars Plan 1 Plan 2 Plan 3 $2,100,000 $2,100,000 $2,100,000 Net income before interest on bonds and income tax Less: Interest on bonds Income before income tax Less: Income tax expense @ 40% Net income Dividends on preferred stock Available for dividends on common stock Divided by: Number of common stock outstanding Earnings per share of common stock $720,000 $1,380,000 $552,000 $828,000 $180,000 $648,000 $2,100,000 $840,000 $1,260,000 $360,000 $900,000 $2,100,000 $840,000 $1,260,000 $1,260,000 1.800.000 900.000 450,000 $0.70 $1.00 $1.44 Conclusion: Hence, Earnings per share of common stock for Plan 1, Plan 2, and Plan 3 is $0.70, $1.00 and $1.44 respectively.

fullscreen
Step 2

2.

help_outline

Image Transcriptionclose

Plan 2 Plan 3 Particulars Plan 1 Net income before interest on bonds $1,050,000 $1,050,000 $1,050,000 and income tax Less: Interest on bonds $720,000 $330,000 $132,000 $198,000 $180,000 $18,000 $1,050,000 $420,000 $630,000 $1,050,000 $420,000 $630,000 $360,000 $270,000 Income before income tax Less: Income tax expense @ 40% Net income Dividends on preferred stock Available for dividends on common $630,000 stock Divided by: Number of common stock outstanding Earnings per share of common stock 900.000 450,000 1.800.000 $0.35 $0.30 S0.04 Conclusion: Hence, Earnings per share of common stock for Plan 1, Plan 2, and Plan 3 is $0.35, $0.30 and S0.04 respectively.

fullscreen
Step 3

Common working notes fo...

help_outline

Image Transcriptionclose

Calculate interest on bonds for plan 3. Interest expense = Face value of bondsx Rate of Interest = $9,000,000 x 8% =S720,000 Calculate dividends on preferred stock for plan 2. Dividends on preferred stock = $9,000,000 x 4% = $360, 000 Calculate dividends on preferred stock for plan 3. Dividends on preferred stock = $4,500,000 x 4% =$180,000 Calculate Number of common stock outstanding for Plan 1. S18,000,000 $10 par =1,800, 000 Number of common stock outstanding = Calculate Number of common stock outstanding for Plan 2. $9,000,000 $10par Number of common stock outstanding = 900,000 Calculate Number of common stock outstanding for Plan 3. $4,500,000 S10 par Number of common stock outstanding = = 450, 000

fullscreen

Want to see the full answer?

See Solution

Check out a sample Q&A here.

Want to see this answer and more?

Solutions are written by subject experts who are available 24/7. Questions are typically answered within 1 hour.*

See Solution
*Response times may vary by subject and question.

Related Accounting Q&A

Find answers to questions asked by student like you
Show more Q&A
add
question_answer

Q: Why is it important to state all partnership assets in terms of current prices at the time of the ad...

A: Partnership: It is a form of an organization which is owned and managed by two or more persons who i...

question_answer

Q: Describe FOB shipping point and FOB destination. When does the buyer take ownership of the goods, an...

A: Click to see the answer

question_answer

Q: The following accounts, with the balances indicated, appear in the ledger of Codigo Co. on December ...

A: 1.Prepare the journal entries for the transactions: 

question_answer

Q: Bernie Ebbers, the CEO of WorldCom, a major telecommunications company, was having personal financia...

A: Company W agreed to lend $400 miliion of personal loan to its CEO at the rate of 2.5%. This was the ...

question_answer

Q: Gomez has a capital balance of $240,000 after adjusting assets to fair market value. Banks contribut...

A: In a partnership form of organization, it is generally owned and managed by 2 or more people who inv...

question_answer

Q: “There is no such thing as a fixed cost. All costs can be ‘unfixed’ given sufficient time.” Do you a...

A: CVP analysis is always for short term decision making and are always directed for a specified time p...

question_answer

Q: Perdue Company purchased equipment on April 1 for $270,000. The equipment was expected to have a use...

A: a. Calculate the amount of depreciation for four ending December 31 by using the straight-line metho...

question_answer

Q: Equipment acquired at a cost of $105,000 has an estimated residual value of $12,000 and an estimated...

A: Straight-line Depreciation: Under the straight-line method of depreciation, the same amount of depre...

question_answer

Q: On January 1, you win $60,000,000 in the state lottery. The $60,000,000 prize will be paid in equal ...

A: Present value: The value of today’s amount expected to be paid or received in the future at a compou...