Effect of financing on earnings per share OBJ. 1 Three different plans for financing an $80,000,000 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:

Plan 1 Plan 2 Plan 3 9% Bonds — — $40,000,000 Preferred 5% stock, $25 par __ $40,000,000 20,000,000 Common stock, $20 par $80,000,000 40,000,000 20,000,000 Total $80,000,000 $80,000,000 $80,000,000 Instructions 1. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $10,000,000.

2. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $6,000,000.

3. Discuss the advantages and disadvantages of each plan.