151A Wilson Co. is considering the following alternative financingplans. Plan1 P

Question

151A

Wilson Co. is considering the following alternative financingplans.

                                                                                        Plan1                                 Plan 2

Issue 12% Bonds (at facevalue)                               $1,000,000                       $500,000

Issue preferred $2 stock, $10 per share                                =                           700,000             

Issue common stock, $10par                                    1,000,000                          800,000

Income tax is estimated at 40% of income. Determine theearnings per share of common stock, assuming income before bondinterest and income tax is $400,000.

Please put answer in chart. Thank you.

PLAN 1

PLAN 2

Earnings before bond interest & incometaxes

Bond interest

Balance

Income tax

Net income

Dividends of preferred stock

Earnings available for common stock

Number of common shares

Earnings per share on common stock

              

PLAN 1

PLAN 2

Earnings before bond interest & incometaxes

Bond interest

Balance

Income tax

Net income

Dividends of preferred stock

Earnings available for common stock

Number of common shares

Earnings per share on common stock

Explanation / Answer

Plan 1

Plan 2

Plan 1

Plan 2

Earnings before bondinterest & 400,000.00 400,000.00 Income Taxes Less: Bond Interest 120,000.00 60,000.00 Earnings after Interest ,before taxes 280,000.00 340,000.00 Less: Taxes 112,000.00 136,000.00 Earnings after Taxes 168,000.00 204,000.00 Dividends per preferredstock 140,000.00 Earnings available forcommon stock 168,000.00 64,000.00 Number of CommonShares 100,000.00 800,000.00 Earnings Per Share 1.68 0.08

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