Alternative Financing Plans Folmar Co. is considering the following alternative
ID: 2468749 • Letter: A
Question
Alternative Financing Plans
Folmar Co. is considering the following alternative financing plans:
Income tax is estimated at 40% of income.
Determine the The profitability ratio of net income available to common shareholders to the number of common shares outstanding.earnings per share on common stock, assuming income before A form of an interest-bearing note used by corporations to borrow on a long-term basis.bond interest and income tax is $444,000.
Enter answers in dollars and cents, rounding to the nearest cent.
Plan 1 Plan 2 Issue 10% bonds (at face value) $1,480,000 $740,000 Issue preferred $1 stock, $10 par — 1,230,000 Issue common stock, $5 par 1,480,000 990,000Explanation / Answer
Folmar Co.
Calculation of Earnings per share on common stock under both plans:
Part 1: Calculation of Earnings or Net income available to common stockholders.
(Amount in $)
PARTICULARS
PLAN – 1
PLAN – 2
EBIT (Earnings or Income Before Interest and Tax)#
444,000
444,000
Less: Interest
148,000
(1,480,000*10%)
74,000
(740,000*10%)
EBT (Earnings or Income Before Tax)
296,000
(444,000-148,000)
370,000
(444,000-74,000)
Tax @ 40%
118,400
(296,000*40%)
148,000
(370,000*40%)
EAT (Earnings or Income After Tax)
(Earnings or income available to preference stock and common stockholders)
177,600
(296,000-118,400)
222,000
(370,000-148,000)
Preference stock dividend
-
123,000
[(1,230,000/10)*1]
Earnings available to Common stockholders
177,600
99,000
(222,000-123,000)
#given income before A form of an interest-bearing note used by corporations to borrow on a long-term basis. Bond interest and income tax. (Assumption)
Part- 2: Calculation of Earnings per share on common stock
(Amount in $)
PARTICULARS
PLAN – 1
PLAN – 2
Earnings available to Common stockholders
177,600
99,000
Number of common stock to be issued
296000
(1,480,000/5)
198000
(990,000/5)
EPS
$0.6
(177600/296000)
$0.5
(99000/198000)
Notes:
2. Preference stockholders are given preferential rights to dividend and capital repayment over common stockholder.
PARTICULARS
PLAN – 1
PLAN – 2
EBIT (Earnings or Income Before Interest and Tax)#
444,000
444,000
Less: Interest
148,000
(1,480,000*10%)
74,000
(740,000*10%)
EBT (Earnings or Income Before Tax)
296,000
(444,000-148,000)
370,000
(444,000-74,000)
Tax @ 40%
118,400
(296,000*40%)
148,000
(370,000*40%)
EAT (Earnings or Income After Tax)
(Earnings or income available to preference stock and common stockholders)
177,600
(296,000-118,400)
222,000
(370,000-148,000)
Preference stock dividend
-
123,000
[(1,230,000/10)*1]
Earnings available to Common stockholders
177,600
99,000
(222,000-123,000)
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