10% bonds: Plan 3: $5,000,000 Preferred 10% stock, $40 par: Plan 2: $5,000,000 a
ID: 2379464 • Letter: 1
Question
10% bonds: Plan 3: $5,000,000
Preferred 10% stock, $40 par: Plan 2: $5,000,000 and Plan 3: 2,500,000
Common stock, 10 par: Plan 1: $10,000,000 Plan 2: 5,000,000 Plan 3: 2,500,000
Total: Plan 1: 10,000,000 Plan 2: 10,000,000 Plan 3: 10,000,000
1. Detemine for each plan the earnings per share of common stock, assuming that the income before the bond interest and income tax is $2,000,000
2. Detemine for each plan the earnings per share of common stock, assuming that the income before the bond interest and income tax is $950,000
Explanation / Answer
PLAN 1 PLAN 2 PLAN 3 TOTAL CAPITAL 10000000 10000000 10000000 COMMON STOCK 10000000 5000000 2500000 PREFERRED STOCK 0 5000000 2500000 BONDS 0 0 5000000 1) INCOME = 2000000 PLAN 1 PLAN 2 PLAN 3 EBIT 2000000 2000000 2000000 INTEREST ON BONDS 0 0 -500000 INCOME BEFORE TAX 2000000 2000000 1500000 TAXES @ 40% -800000 -800000 -600000 NET INCOME 1200000 1200000 900000 DIVIDENDS ON PRFERENCE SHARES 0 -500000 -250000 AVAILABLE FOR DIVIDENDS TO COMMON STOCK 1200000 700000 650000 SHARES OF COMMON STOCK 1000000 500000 250000 EPS ON COMMON STOCK 1.2 1.4 2.6 THUS, WE CAN SEE THAT PLAN 3 IS BETTER 2) INCOME = 950000 PLAN 1 PLAN 2 PLAN 3 EBIT 950000 950000 950000 INTEREST ON BONDS 0 0 -500000 INCOME BEFORE TAX 950000 950000 450000 TAXES @ 40% -380000 -380000 -180000 NET INCOME 570000 570000 270000 DIVIDENDS ON PRFERENCE SHARES 0 -500000 -250000 AVAILABLE FOR DIVIDENDS TO COMMON STOCK 570000 70000 20000 SHARES OF COMMON STOCK 1000000 500000 250000 EPS ON COMMON STOCK 0.57 0.14 0.08 THUS, WE CAN SEE THAT PLAN 1 IS BETTER
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