1.

To determine

Calculate earnings per share of common stock for each plan, if income before bond interest and income tax is $10,000,000. Explanation of Solution 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(EPS)=Net income Preferred dividends Number of common shares outstanding Determine Earnings per share of common stock.  Particulars Plan 1 Plan 2 Plan 3 Net income before interest on bonds and income tax$10,000,000 $10,000,000$10,000,000 Less: Interest on bonds - - $3,600,000(1) Income before income tax$10,000,000 $10,000,000$6,400,000 Less: Income tax expense $4,000,000(2)$4,000,000(2) $2,560,000(3) Net income$6,000,000 $6,000,000$3,840,000 Dividends on preferred stock - $2,000,000(4)$1,000,000(5) Available for dividends on common stock $6,000,000$4,000,000 $2,840,000 Number of common stock outstanding ÷4,000,000(6) ÷2,000,000(7) ÷1,000,000(8) Earnings per share of common stock$1.50 $2.00$2.84

Table (1)

Working notes:

(1)

Calculate interest on bonds for plan 3.

Interest expense=Facevalueofbonds×Rate of Interest= $40,000,000×9%=$3,600,000

(2)

Calculate income tax expense for plan 1 and plan 2.

Income tax expense=(Incomebeforeincometax×Incometaxpercentage)=$10,000,000×40%=$4,000,000

(3)

Calculate income tax expense for plan 3

2.

To determine

Calculate earnings per share of common stock for each plan, if income before bond interest and income tax is \$6,000,000.

3.

To determine

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