Answered: Please help in detail Alternative…

Financial Accounting

15th Edition

ISBN:9781337272124

Author:Carl Warren, James M. Reeve, Jonathan Duchac

Publisher:Carl Warren, James M. Reeve, Jonathan Duchac

Chapter14: Long-term Liabilities: Bonds And Notes

Section: Chapter Questions

Problem 1PEB: Brower Co. is considering the following alternative financing plans: Income tax is estimated at 40%...

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Please help in detail

Alternative Financing Plans

Folmar Co. is considering the following alternative financing plans:

Income tax is estimated at 40% of income.

Determine the earnings per share on common stock, assuming income before bond interest and income tax is $416,000.

Enter answers in dollars and cents, rounding to the nearest cent.

Please help

	Plan 1	Plan 2
Issue 10% bonds (at face value)	$1,040,000	$520,000
Issue preferred $1 stock, $10 par	—	860,000
Issue common stock, $5 par	1,040,000	700,000

Expert Solution

Step 1

Earnings per share are profits available for common stock divided by a number of outstanding common shares.

Step 2

The formula for EPS:

$E P S = \frac{(E B I T - I n t e r e s t) (1 - t a x) - P r e f r e n c e D i v i d e n d}{O u t s \tan d i n g C o m m o n S t o c k}$

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