Effect of Financing on Earnings Per Share Three different plans for financing a
ID: 2452124 • Letter: E
Question
Effect of Financing on Earnings Per Share Three different plans for financing a $5,000,000 corporation are under consideration by its organizers. Under each of the following plans, the securities will be issued at their par or face amount, and the income tax rate is estimated at 40% of income. Plan 1 Plan 2 Plan 3 10% bonds _ _ $2,500,000 Preferred 10% stock, $40 par _ $2,500,000 1,250,000 Common stock, $5 par $5,000,000 2,500,000 1,250,000 Total $ 5,000,000 $ 5,000,000 $ 5,000,000 Required: 1. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $10,000,000. Enter answers in dollars and cents, rounding to the nearest cent. Earnings Per Share on Common Stock Plan 1 $ Plan 2 $ Plan 3 $ 2. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $4,750,000. Enter answers in dollars and cents, rounding to the nearest cent. Earnings Per Share on Common Stock Plan 1 $ Plan 2 $ Plan 3 $
Explanation / Answer
Plan 1
EBIT=$4,750,000 Tax rate=40% No of shares =5,000,000/5=1,000,000
Interest=0
Earning after tax=(4,750,000)*(1-40%)=2,850,000
EPS=2,850,000/1,000,000= 2.85
Plan 2
EBIT=$4,750,000 Tax rate=40% No of shares =2,500,000/5=500,000
Interest=0
Net profit=4,750,000*(1-40%)=2,850,000
Prefered dividend=2,500,000*10%= 250,000
EPS=(2,850,000-250,000)/500,000=5.2
Plan 3
EBIT=$4,750,000 Tax rate=40% No of shares =1,250,000/5=250,000
Interest=2,500,000*10%= 250,000
Net profit =(4,750,000-250,000)*(1-40%)
=$2,700,000
Prefered dividend=1,250,000*10%=125,000
EPS=(2,700,000-125,000)/250,000
=10.3
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.