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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

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


Discuss the advantages and disadvantages of each plan.

To determine

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:

  Basic Earnings per share=Net Income - Preferred DividendWeighted Average Common Shares Outstanding

   Net Income available to common stockholder = Net income  Preferred Dividend

To Discuss:

Each plan

Explanation

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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