Answered: Plan 1 Plan 2 Plan 3 9% Bonds…

Plan 1 Plan 2 Plan 3 9% Bonds $40,000,000 Preferred 5% stock, $25 par Common stock, $20 par $40,000,000 20,000,000 $80,000,000 40,000,000 20,000,000 Total $80,000,000 $80,000,000 $80,000,000

Corporate Financial Accounting

14th Edition

ISBN:9781305653535

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

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

ChapterD: Investments

Section: Chapter Questions

Problem D.10EX: Fair value journal entries, trading investments Jets Bancorp Inc. purchased a portfolio of trading...

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Question

Three different plans for financing an $80,000,000 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 for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $10,000,000.
2. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $6,000,000.
3. Discuss the advantages and disadvantages of each plan.

Plan 1
Plan 2
Plan 3
9% Bonds
$40,000,000
Preferred 5% stock, $25 par
Common stock, $20 par
$40,000,000
20,000,000
$80,000,000
40,000,000
20,000,000
Total
$80,000,000
$80,000,000
$80,000,000

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