Frey Co. is considering the following alternative financing plans: Plan 1 Plan 2
ID: 2524674 • Letter: F
Question
Frey Co. is considering the following alternative financing plans: Plan 1 Plan 2 Issue 10% bonds (at face value) $1,800,000 $900,000 Issue preferred $1 stock, $10 par — 1,490,000 Issue common stock, $5 par 1,800,000 1,210,000 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 $540,000. 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
Solution:
Capital Structure
Plan 1
Plan 2
Issue 10% bonds (at face value)
$1,800,000
$900,000
Issue Preferred $1 stock, $10 par
0
$1,490,000
Issue Common Stock $5 Par
$1,800,000
$1,210,000
Total
$3,600,000
$3,600,000
Calculation of EPS
Income before interest and taxes
$540,000
$540,000
Less: Interest on Bonds
Plan 1 = 1,800,000*10%
$180,000
Plan 2 = $900,000*10%
$90,000
Income before tax
$360,000
$450,000
Less: Taxes @ 40%
$144,000
$180,000
Income After Tax
$216,000
$270,000
Less: Preferred Dividend (number of preferred shares 149,000 * $1)
$0
$149,000
Income Available to Common Stockholders'
$216,000
$121,000
Divide by Number of Common Shares
Plan 1 = $1,800,000 / 5
360000
Plan 2 = 1,210,000 / 5
242000
Earnings Per Share
$0.60
$0.50
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Capital Structure
Plan 1
Plan 2
Issue 10% bonds (at face value)
$1,800,000
$900,000
Issue Preferred $1 stock, $10 par
0
$1,490,000
Issue Common Stock $5 Par
$1,800,000
$1,210,000
Total
$3,600,000
$3,600,000
Calculation of EPS
Income before interest and taxes
$540,000
$540,000
Less: Interest on Bonds
Plan 1 = 1,800,000*10%
$180,000
Plan 2 = $900,000*10%
$90,000
Income before tax
$360,000
$450,000
Less: Taxes @ 40%
$144,000
$180,000
Income After Tax
$216,000
$270,000
Less: Preferred Dividend (number of preferred shares 149,000 * $1)
$0
$149,000
Income Available to Common Stockholders'
$216,000
$121,000
Divide by Number of Common Shares
Plan 1 = $1,800,000 / 5
360000
Plan 2 = 1,210,000 / 5
242000
Earnings Per Share
$0.60
$0.50
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