Financial and Managerial Accounting: P13-1A Effect of financing on earnings per share

Financial and Managerial Accounting 
PROBLEM 13-1A Effect of financing on earnings per share 
Three different plans for financing a $30,000,000 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 
8% bonds - - 20,000,000 
Preferred $2 stock, $50 par - 20,000,000 10,000,000 
Common stock, $10 par 40,000,000 20,000,000 10,000,000 
Total $40,000,000 $40,000,000 $40,000,000 

Instructions: 
1. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $20,000,000. 
2. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $2,600,000. 
3. Discuss the advantages and disadvantages of each plan.
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