Survey of Accounting (Accounting I)
Solutions
Survey of Accounting (Accounting I)
Effect of financing on earnings per share
Three different plans for financing a $5,000,000 corporation are under consideration hy its organizers. I'nder 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
Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $1,000,000.
Concept Introduction:
Basic Earnings per share:
The Basic Earnings per share is the amount of net income earned by each common share outstanding. The Earnings per share calculated by with help of following formula:
To Calculate:
The earnings per share for each plan
The earnings per share for each plan are calculated as follows:
| Plan 1 | Plan 2 | Plan 3 | |
| Income before interest and tax (A) | $ 1,000,000 | $ 1,000,000 | $ 1,000,000 |
| Interest on Bonds (B) | $ - | $ - | $ 200,000 |
| (2500000*8%) | |||
| Income before tax (C) = (A-B) | $ 1,000,000 | $ 1,000,000 | $ 800,000 |
| Income Tax (D) = (C*40%) | $ 400,000 | $ 4... |
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