Business is going well for David Johns Inc., the company that operates remote pa
ID: 2751764 • Letter: B
Question
Business is going well for David Johns Inc., the company that operates remote parking lots near major airports. The board of directors of this familyowned company believes that David Johns Inc. could earn an additional $1.5 million income before interest and taxes by expanding into new markets. However, the $5 million that the business needs for growth cannot be raised within the family. The directors, who strongly wish to retain family control of the company, must consider issuing securities to outsiders. The directors are considering the three following financing plans:
1 Plan A: to issue 100,000 bonds of 6% interest.
2 Plan B: to issue 100,000 ordinary shares.
3 Plan C: to issue 100,000 nonvoting preference shares ($3.75 is the annual dividend paid on each share of preference shares).
Davis Johns Inc. presently has net income of $3.5 million and 1 million of shares of ordinary shares outstanding. The company’s income tax rate is 35%.
REQUIREMENTS.
1 Prepare an analysis to determine which plan will result in the highest earning per share of ordinary share capital.
2 Recommend a plan to the board of directors. Give your reasons.
Explanation / Answer
As per calculation Plan 'A' Give Highest earning per shares.
Answer -2 However Plan 'A' is looking in the favour of ordinary share holders butI will be prefear plan 'B' to implement because this plan is not create any interest or compulsary dividend burden on the company. If company do not earn profit as per expectation due to any reason. Company will be not binding any compulsary obligation. Company will not be bind to bear a loss. So, I will be recommended Plan 'B' to the management.
Plan A B C Bonds Ord Shares Pref Shares Additional Income Earned 1500000 1500000 1500000 Interest payable (5000000*6%) 300000 0 0 EBT 1200000 1500000 1500000 Tax @ 35% 420000 525000 525000 Net Additional Income 780000 975000 975000 Net Existing Income 3500000 3500000 3500000 Total Income 4280000 4475000 4475000 Pref. Dividend Paid (100000*3.75) 0 0 375000 Fund available to Ord Share Holders 4280000 4475000 4100000 Total Shares 1000000 1100000 1000000 Earning Per Shares 4.28 4.07 4.10Related Questions
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