Effect of Financing on Earnings Per Share

Three different plans for financing a $6,700,000 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
10% bonds...
Preferred 5% stock, $80 par... __
Common stock, $6.70 par... $6,700,000
Total... 6,700,000

Plan 2
10% bonds... __
Preferred 5% stock, $80 par... $3,350,000
Common stock, $6.70 par... 3,350,000
Total... $...

Plan 3
10% bonds... $3,
Preferred 5% stock, $80 par... 1,675,000
Common stock, $6.70 par... 1,675,000
Total...

1. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $13,400,000. 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 $6,365,000. Enter answers in dollars and cents, rounding to the nearest cent.

Earnings per share on common stock
Plan 1_________
Plan 2_________
Plan 3_________

What do YOU think ?
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1. Pretax profit less tax = 13,400,000 *.60 = 8,040,000 / 1,000,000 shares = $8.04
2. After tax profit 8,040,000 - pref dividends 167,500 = $7.8725
3. Pretax profit 8,040,000
Bond interest 335,000
Net Income 7,705,000
Pref dividends 167,500
Balance 7,538,000/1,000,000 = $7.538

1.

Plan 1 = 8.04
Plan 2 = 15.75
Plan 3 = 31.02

2.

Plan 1 = 3.82
Plan 2 = 7.30
Plan 3 = 14.14

1.

Plan 1 = 8.04
Plan 2 = 15.75
Plan 3 = 31.02

2.

Plan 1 = 3.82
Plan 2 = 7.30
Plan 3 = 14.14

Can you please explain how you arrived at these figures? They differ with mine.