Three different plans for financing a $8,800,000 corporation are under considera
ID: 2426177 • Letter: T
Question
Three different plans for financing a $8,800,000 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.
Required:
1. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $17,600,000. Enter answers in dollars and cents, rounding to the nearest cent.
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 $8,360,000. Enter answers in dollars and cents, rounding to the nearest cent.
Plan 1
Plan 2
Plan 3
Plan 1 Plan 2 Plan 3 10% bonds _ _ $4,400,000 Preferred 5% stock, $80 par _ $4,400,000 2,200,000 Common stock, $8.80 par $8,800,000 4,400,000 2,200,000 Total $ 8,800,000 $ 8,800,000 $ 8,800,000Explanation / Answer
Income before bond interest and income tax = 17600000
Plan 1 =
EPS = earnings available for equityshreholders / share outstanding
Earnings available for equityshareholders = 17600000 * (1-0.40)
= 10560000
= $ 10560000 / 1000000
= $ 10.6
Plan 2=
Earnings available for equityshareholder =
Income before bond interest an income tax is $17,600,000
Less- tax = 7040000
Income after tax = 10560000
Less- preferred dividend = 220000
Earnings available for equityshareholder = 10340000
EPS = 10340000 / 500000
= 20.68
Plan 3= Earnings available for equityshareholders = 17600000 * (1-0.40)
Income before bond interest an income tax is $17,600,000
Less interest = 440000
Income after interest before tax = 17160000
Less- tax = 6864000
Income after tax = 10296000
Less- preferred dividend = 110000
Earnings available for equity share holder = 10186000
EPS = 10186000 / 250000
= 40.744
2) Income before bond interest and income tax = 8360000
Plan 1 =
EPS = earnings available for equityshreholders / share outstanding
Earnings available for equityshareholders = 8360000 * (1-0.40)
= 5016000
EPS = $ 3344000 / 1000000
= $ 3.344
Plan 2=
Earnings available for equityshareholder =
Income before bond interest an income tax is $8360000
Less- tax = 3344000
Income after tax = 5016000
Less- preferred dividend = 220000
Earnings available for equityshareholder = 4796000
EPS = 4796000 / 500000
= 9.592
Plan 3= Earnings available for equityshareholders =
Income before bond interest an income tax is $8360,000
Less interest = 440000
Income after interest before tax = 7920000
Less- tax = 3168000
Income after tax = 5192000
Less- preferred dividend = 110000
Earnings available for equity share holder = 5082000
EPS = 5082000/250000
= 20.238
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