BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 14, Problem 14.1APE
Textbook Problem

Alternative financing plans

Frey co. is considering the following alternative financing plans:

  Plan1 Plan2

Issue 5% bonds (at face value)

$6,000,000

$2.000,000

Issue preferred $1 stock. $20 par

6,000,000

Issue common stock. $25 par

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.

Expert Solution
To determine

Bonds: Bonds are long-term promissory notes that are represented by a company while borrowing money from investors to raise fund for financing the operations.

Common stock: It refers to a security issued in a form of certificate and implies the right of ownership of an investor over a portion of company’s earnings and assets.

Earnings per Share: It is a portion of profit that is earned by each common stock.

Formula:

Earnings per share=Net income Preferred dividends Number of common shares outstanding

To Determine: Earnings per share of common stock.

Explanation of Solution

Determine Earnings per share of common stock.

Particulars Plan 1 Plan 2
Net income before interest on bonds and income tax $800,000 $800,000
Less: Interest on bonds $300,000(1) $100,000(2)
Income before income tax $500,000 $700,000
Less: Income tax expense $200,000(3) $280,000(4)
Net income $300,000 $420,000
Dividends on preferred stock - $300,000(5)
Available for dividends on common stock $300,000 $120,000
Number of common stock outstanding ÷ 240,000(6) ÷ 160,000(7)
Earnings per share of common stock $1.25 $0.75

Table (1)

Working notes:

Calculate interest on bonds for plan 1.

Interest expense=Facevalueofbonds×Rate of Interest= $6,000,000×5%=$300,000 (1)

Calculate interest on bonds for plan 2.

Interest expense=Facevalueofbonds×Rate of Interest= $2,000,000×5%=$100,000 (2)

Calculate income tax expense for plan 1.

Income tax expense=(Incomebeforeincometax×Incometaxpercentage)=$500,000×40%=$200,000 (3)

Calculate income tax expense for plan 2

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Chapter 14 Solutions

Accounting
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Ch. 14 - Alternative financing plans Frey co. is...Ch. 14 - Alternative financing plans Brower co. is...Ch. 14 - Issuing bonds at face amount On January 1, the...Ch. 14 - Issuing bonds at face amount On January 1, the...Ch. 14 - Issuing bonds at a discount On the First day of...Ch. 14 - Issuing bonds at a discount On the first day of...Ch. 14 - Discount amortization Using the bond from Practice...Ch. 14 - Discount amortization Using the bond from Practice...Ch. 14 - Issuing bonds at a premium On the first day of the...Ch. 14 - Issuing bonds at a premium On the first day of the...Ch. 14 - Premium amortization Using the bond from Practice...Ch. 14 - Premium amortization Using the bond from Practice...Ch. 14 - A Redemption of bonds payable A 1,500,000 bond...Ch. 14 - Redemption of bonds payable A 1,200,000 bond issue...Ch. 14 - Journalizing installment notes On the first day of...Ch. 14 - Journalizing installment notes On the first day of...Ch. 14 - Times interest earned Berry Company reported the...Ch. 14 - Times interest earned Aver ill Products Inc....Ch. 14 - Effect of financing on earnings per share Domanico...Ch. 14 - Evaluate alternative financing plans Based on the...Ch. 14 - Corporate financing The financial statements for...Ch. 14 - Bond price Stone Energy Corporation's 7.5% bonds...Ch. 14 - Entries for issuing bonds Thomson Co. products and...Ch. 14 - Entries for issuing bonds and amortizing discount...Ch. 14 - Entries for issuing bonds and amortizing premium...Ch. 14 - Entries for issuing and calling bonds; loss Adele...Ch. 14 - Entries for issuing and calling bonds; gain Emil...Ch. 14 - Entries for installment note transactions On the...Ch. 14 - Entries for installment note transactions On...Ch. 14 - Entries for installment note transactions On...Ch. 14 - Reporting bonds At the beginning of the current...Ch. 14 - Times interest earned The following data were...Ch. 14 - Times interest earned Loomis, Inc. reported the...Ch. 14 - Times interest earned lacouva Company reported the...Ch. 14 - Present value of amounts due Tommy John is going...Ch. 14 - Present value of an annuity Determine the present...Ch. 14 - Present value of an annuity On January 1, you win...Ch. 14 - Present value of an annuity Assume the same data...Ch. 14 - Present value of bonds payable; discount Pinder...Ch. 14 - Present value of bonds payable; premium Moss Co....Ch. 14 - Amortize discount by interest method On the first...Ch. 14 - Amortize premium by interest method Shunda...Ch. 14 - Compute bond proceeds, amortizing premium by...Ch. 14 - Compute bond proceeds, amortizing discount by...Ch. 14 - Effect of financing on earnings per share Three...Ch. 14 - Bond discount, entries for bonds payable...Ch. 14 - Bond premium, entries for bonds payable...Ch. 14 - Entries for bonds payable and installment note...Ch. 14 - Bond discount, entries for bonds payable...Ch. 14 - Bond premium, entries for bonds payable...Ch. 14 - Effect of financing on earnings per share Three...Ch. 14 - Bond discount, entries for bonds payable...Ch. 14 - Bond premium, entries for bonds payable...Ch. 14 - Entries for bonds payable and installment note...Ch. 14 - Bond discount entries for bonds payable...Ch. 14 - Bond premium, entries for bonds payable...Ch. 14 - Ethics in Action CEG Capital Inc. is a large...Ch. 14 - Communication Nordbock Inc. reports the following...Ch. 14 - Present values Alex Kelton recently won the...Ch. 14 - Preferred stock vs. bonds Xentec Inc. has decided...Ch. 14 - Financing business expansion You hold a 25% common...Ch. 14 - Times interest earned The following financial data...

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