Page 1 o 1. PE.14-01.ALGO (Algorithmic) Alternative Financing Plans Frey Co. is

Question

Page 1 o 1. PE.14-01.ALGO (Algorithmic) Alternative Financing Plans Frey Co. is considering the following alternative financing plans: Plan 2 $420,000 -700,000 560,000 Plan 1 Issue 10% bonds (at face value) $840,000 Issue preferred $1 stock, $10 par Issue common stock, $5 par 840,000 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 $504,000. Enter answers in dollars and cents, rounding to the nearest cent. Plan 1$ Plan 2 $ Earnings per share on common stock

Explanation / Answer

Plan 1 Plan 2 Income Before Bond Interest & income Tax 504000 504000 Less : Interest on Bonds -84000 -42000 Income before Income Tax 420000 462000 Less : Income Tax -168000 -184800 Net Income (A) 252000 277200 Less : Dividend on Preferred Stock (Plan -1)                     -   Less : Dividend on Preferred Stock (Plan -2) 70000 (700000/10*1) Available Dividends for Common Stock (B) 252000 207200 No. of Common Stock (C) 168000                -   (840000/5) NO. of Common Stock (C) 112000 (560000/5) Earning per Share on Common Stock- Plan 1 (B/C) 1.5 Earning per Share on Common Stock-Plan 2 (B/C) 1.85

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