Frey Co. is considering the following alternative financing plans: 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. BuyFindarrow_forward Financial Accounting 15th Edition Carl Warren + 2 others Publisher: Cengage Learning ISBN: 9781337272124 Solutions Chapter Section BuyFindarrow_forward Financial Accounting 15th Edition Carl Warren + 2 others Publisher: Cengage Learning ISBN: 9781337272124 Chapter 14, Problem 1PEA Textbook Problem 3 views Frey Co. is considering the following alternative financing plans: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.

To determine

Calculate earnings per share of common stock.

Explanation of Solution

Bonds: Bonds are long-term promissory notes that are issued 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

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: (1) Calculate interest on bonds for plan 1. Interest expense=Facevalueofbonds×Rate of Interest=$6,000,000×5%=$300,000 (2) Calculate interest on bonds for plan 2. Interest expense=Facevalueofbonds×Rate of Interest=$2,000,000×5%=\$100,000

(3)

Calculate income tax expense for plan 1

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