Survey of Accounting, 6th Edition, by Warren

P8-6 Effect of financing on earnings per share

Three different plans for financing a $5,000,000 corporation are under consideration by its organizers. Uner each of the following plans, the securities will be issued at their par of face amount, and the income tax rate is estimated at 40% of income

	Plan 1	Plan 2	Plan 3
8 % bonds	--	--	$2,500,000
Preferred 4% stock, $100 par	--	$2,500,000	1,250,000
Common stock, $5 par	$5,000,000	2,500,000	1,250,000
Total	$5,000,000	$5,000,000	$5,000,000

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

2. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $300,000.

3. Discuss the advantages and disadvantages of each plan.

Below is a template from my class...Please use this when answering.

1.			Plan 1		Plan 2		Plan 3
		Earnings before interest and income tax
		Deduct interest on bonds	-		-
		Income before income tax
		Deduct income tax
		Net income
		Dividends on preferred stock	-
		Available for dividends on common stock
		Divide by shares of common stock outstanding
		Earnings per share on common stock					$1.72
2.			Plan 1		Plan 2		Plan 3
		Earnings before interest and income tax
		Deduct interest on bonds
		Income before income tax
		Deduct income tax
		Net income
		Dividends on preferred stock
		Available for dividends on common stock
		Divide by shares of common stock outstanding
		Earnings per share on common stock