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 1,440,000 $720,000 1,200,000 1,440,000 960,000 Issue 10% bonds (at face value) Issue preferred $1 stock, $10 par Issue common stock, $5 par 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 $1,152,000. 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

Plan 1 Plan 2 Income before interest and tax 1152000 1152000 Less: Interest expense 144000 72000 Income before tax 1008000 1080000 Less: tax expense 403200 432000 Net income 604800 648000 Less: Preferred dividends 0 120000 Net income for common stockholders 604800 528000 Common shares outstanding 288000 192000 Earnings per share 2.1 2.75

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