Alternative Financing Plans Frey Co. is considering the following alternative fi

Question

Alternative Financing Plans Frey Co. is considering the following alternative financing plans: Plan 1 Plan 2 Issue 10% bonds (at face value) $1,440,000 $720,000 Issue preferred $1 stock, $10 par — 1,200,000 Issue common stock, $5 par 1,440,000 960,000 Income tax is estimated at 40% of income. Determine the earnings per share on common stock, assuming that income before bond interest and income tax is $432,000. Enter answers in dollars and cents, rounding to the nearest cent. Plan 1 $ Earnings per share on common stock Plan 2 $ Earnings per share on common stock

Explanation / Answer

Particulars Plan 1 Plan 2 Earnings before interest and tax (EBIT) $432000 $432000 Interest Expense: Plan 1(1440000*10%), plan 2($720000*10%) (144000) (72000) Earnings Before Tax(EBT) $288000 $360000 Tax @ 40% (115200) (144000) Earnings after tax(EAT)/Net Income $172800 $216000 Preference Dividend(1200000/$10) 0 (120000) Earnings available for common share holders(a) $172800 $96000 Common shares outstanding(b) 288000 192000 EPS(a/b) $0.60 $0.50

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