1. Effect of Financing onEarnings Per Share
2. 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

Required:

1.Determine for each plan the earnings per share of common stock, assuming that the income beforebondinterest and income tax is $10,000,000. Enter answers in dollars and cents, rounding to the nearest whole cent.

Earnings Per Share on Common Stock

Plan 1 $

Plan 2 $

Plan 3 $

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. Enter answers in dollars and cents, rounding to the nearest whole cent.

Earnings Per Share on Common Stock

Plan 1 $

Plan 2 $

Plan 3 $

1. 3.The principal of Plan 3 is that investment would need to be made by common shareholders.