Ulmer Company is considering the following alternative financing plans: Plan 1 I
ID: 2379155 • Letter: U
Question
Ulmer Company is considering the following alternative financing plans:
Plan 1
Issue 8% bonds at face value $2,000,000
Issue preferred $1 stock, $15 per share- $0
Issue common stock, $10 par 2,000,000
Plan 1
Issue 8% bonds at face value $2,000,000
Issue preferred $1 stock, $15 per share- $0
Issue common stock, $10 par 2,000,000
Plan 2
Issue 8% bonds at face value $1,000,000
Issue preferred $1 stock, $15 per share- $1,500,000
Issue common stock, $10 par 1,500,000
Income tax is estimated at 35% of income.
Required: Determine the earnings per share of common stock, assuming income before bond interest and income tax is $600,000.
Plan 1 Plan 2
Earnings before bond intrest and income tax _______ _______
Bond Intrest _______ ________
Balance _______ _______
Income Tax ______ _______
Dividends on peferred stock ______ _______
Earnings availabl for common stock _______ _________
Number of common shares _______ ________
Earnings per share on common stock ________ ________
Explanation / Answer
Plan 1
Issue 8% bonds at face value $2,000,000
Issue preferred $1 stock, $15 per share- $0
Issue common stock, $10 par 2,000,000 (200,000 shares)
600,000 EBIT
- 160,000 (8% x 2,000,000) Interest Expense
= 440,000 Earnings before income tax
- 154,000 (440,000 x 35%) Income tax
= 286,000 net income
286,000 / 200,000 = $1.43 EPS
Plan 2
Issue 8% bonds at face value $1,000,000
Issue preferred $1 stock, $15 per share- $1,500,000
Issue common stock, $10 par 1,500,000 (150,000 shares)
600,000 EBIT
- 80,000 (8% x 1,000,000) Interest Expense
= 520,000 Earnings before income tax
- 182,000 (520,000 x 35%) Income tax
= 338,000 net income
1,500,000 / 15 = $100,000 preferred dividends
(338,000 - 100,000) / 150,000 = $1.59 EPS
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