Question

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:

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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
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Transcribed Image Text

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