Question

Plan 1 Plan 2 Issue 10% Bonds (at face) $400,000 Issue $10 par Common Stock $600,000 $200,000 Income tax is estimated at 40% of income. Determine the earnings per share of common stock under the two alternative financing plans, assuming income before bond interest and income tax is $150,000. Round your answers to two decimal places. Plan 1 Plan 2

Answer 1

Particulars	Plan 1	Plan 2
Earning before bond interest and Income Tax	$ 150,000	$ 150,000
Bond Interest Expense	----	$ 40,000
Balance	$ 150,000	$110,000
Income Tax ( 40%)	$ 60,000	$ 44,000
Net Income	$ 90,000	$ 66,000
Dividend on Preferred Stock	0	0
Earnings Available for Common Stock	$ 90,000	$ 66,000
Number of Common Shares	$ 60,000	$ 20,000
	1.50	3.30

Calculations;

Bond Interest Expense = $ 400,000 * 10 % = $ 40,000

Income Tax Plan 1= $ 150,000 * 40 % =$ 60,000

Plan 2 = $ 110,000 * 40% = $ 44,000

Number of Common Shares Plan 1= $ 600,000 * 10% = $60,000

   Plan 2 = $200,000 * 10 % = $ 20,000