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 25% of income. Plan 1 Plan 2 Plan 3 5% bonds $7,000,000 Preferred 4% stock, $40 par $10,000,000 7,000,000 Common stock, $10 par $18,000,000 8,000,000 4,000,000 $18,000,000 $18,000,000 $18,000,000 a. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $1,400,000. b. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $1,000,000. c. Discuss the advantages and disadvantages of each plan. Show your calculations.
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 25% of income. Plan 1 Plan 2 Plan 3 5% bonds $7,000,000 Preferred 4% stock, $40 par $10,000,000 7,000,000 Common stock, $10 par $18,000,000 8,000,000 4,000,000 $18,000,000 $18,000,000 $18,000,000 a. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $1,400,000. b. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $1,000,000. c. Discuss the advantages and disadvantages of each plan. Show your calculations.
Survey of Accounting (Accounting I)
8th Edition
ISBN:9781305961883
Author:Carl Warren
Publisher:Carl Warren
Chapter8: Liabilities And Stockholders' Equity
Section: Chapter Questions
Problem 8.1.3P
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Transcribed Image Text:Chapter 14
Three different plans for financing a $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 25% of income.
Plan 1
Plan 2
Plan 3
5% bonds
$7,000,000
Preferred 4% stock, $40 par
$10,000,000
7,000,000
Common stock, $10 par
$18,000,000
8,000,000
4,000,000
$18,000,000
$18,000,000
$18,000,000
a. Determine for each plan the earnings per share of common stock, assuming that the income before.
bond interest and income tax is $1,400,000.
b. Determine for each plan the earnings per share of common stock, assuming that the income before
bond interest and income tax is $1,000,000.
c. Discuss the advantages and disadvantages of each plan.
Show your calculations.
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