Question: Effect of Financing on Earnings Per Share

Three different plans for financing a $2,400,000 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                                       _                  _             $1,200,000

Preferred 10% stock, $40 par              _             $1,200,000        600,000

Common stock, $2.4 par               $2,400,000       1,200,000         600,000

Total                                        $ 2,400,000     $ 2,400,000     $ 2,400,000

Required: 1. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $4,800,000. Enter answers in dollars and cents, rounding to the nearest 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 $2,280,000. Enter answers in dollars and cents, rounding to the nearest cent.

Earnings Per Share on Common Stock

Plan 1 $

Plan 2 $

Plan 3 $

3. The principal ______ of Plan 1 is that it involves only the issuance of common stock, which does not require a periodic interest payment or return of principal, and a payment of preferred dividends _____ required.