14.5

Effect of Financing on Earnings Per Share Three different plans for financing an $5,500,000 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 10% Bonds $2,800,000 Preferred 5% stock, $80 par $2,800,000 1,400,000 Common stock, $5.6 par $5,600,000 2,800, 500 1,400,000 Total $ 5,600,000 $ 5,600,000 $ 5,600,000 Required: 1. Determine the earnings per share of common stock for each plan, assuming that the income before bond interest and income tax is $11,200,000. Enter answers in dollars and cents, rounding to two decimal places. Earnings Per Share on Common Stock Plan 1 6.72 Plan 2 13 X Plan 3 0.83 X 2. Determine the earnings per share of common stock for each plan, assuming that the income before bond interest and income tax is $5,320,000. Enter answers in dollars and cents, rounding to two decimal places. Plan 2 13 X Plan 3 0.83 x 2. Determine the earnings per share of common stock for each plan, assuming that the income before bond interest and income tax is $5,320,000. Enter answers in dollars and cents, rounding to two decimal places. Earnings Per Share on Common Stock 3.19 Plan 1 Plan 2 0.61 X Plan 3 0.38 X 3. The principal advantage of Plan 1 is that it involves only the issuance of common slock, which does not require a periodic interest payment or return of principal, and a payment of preferred dividends is not required