STEP BY STEP SOLUTIONS FOR THE COMPLETE QUESTION. SHOW HOW TO ARRIVE AT EACH ANS

Question

STEP BY STEP SOLUTIONS FOR THE COMPLETE QUESTION. SHOW HOW TO ARRIVE AT EACH ANSWER

Sorenson Co., is considering the following alternative plans for financing the company: Plan Plan 2 Issue 10% Bonds (at face) Issue $10 par Common Stock Income tax is estimated at 40% of income. Determine the earnings per share of common stock under the two alternative financing plans, assuming income before bond interest and income tax is $9,000. Round your answers to two decimal places. Plan 1 Plan 2 $20,000 $30,000$10,000 1.80 5.33 X

Explanation / Answer

Number of common stock = Common stock ÷ Face value of common stock

Number of common stock under Plan 1 = 30,000÷10 = 3,000 stock

Number of common stock under Plan 2 = 10,000÷10 = 1,000 stock

Earnings per share = Net income ÷ Number of common stock

Earnings per share under Plan 1 = 5,400÷3,000 = $1.80

Earnings per share under Plan 2 = 4,200÷1,000 = $4.20

Plan 1 Plan 2 Income before bond interest and income tax $9,000 $9,000 Less: Bond interest (10% × $20,000) 0 2,000 Income before income tax 9,000 7,000 Less: Income tax @ 40% 3,600 2,800 Net income $5,400 $4,200

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