Effect of Financing on Earnings Per Share

Three different plans for financing a $7,000,000 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
10% bonds		_		_		$3,500,000
Preferred 10% stock, $100 par		_		$3,500,000		1,750,000
Common stock, $7 par		$7,000,000		3,500,000		1,750,000
	Total	$7,000,000		$7,000,000		$7,000,000

Round the answers to nearest cent.

Instructions:

1. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $14,000,000.

	Earnings per share of common stock
Plan 1	$ per share
Plan 2	$ per share
Plan 3	$ per share

2. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $6,650,000.

	Earnings per share of common stock
Plan 1	$ per share
Plan 2	$ per share
Plan 3	$ per share

3. Regarding the three plans, which of the following statements is true?