Problem #7 KKM Corporation discussed three different plans to finance $4,000,000 toward construction of a new warehouse. Under each of the following plans the securities will be issued at their par or face value amount, and the income tax rate is estimated at 25% of income. Plan#1 Preferred 10% stock $40 Par Common stock $10 Par 10% Bonds Total

Plan#2 Plan#3 2,000,000 4,000,000 2,000,000 1,000,000 3,000,000 4,000,000 4,000,000 4,000,000

Instructions: 1. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $800,000. 2. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $450,000. 3. Discuss the advantages and disadvantages of each plan.