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    kellyrexsun's Avatar
    kellyrexsun Posts: 2, Reputation: 1
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    #1

    Oct 16, 2013, 06:28 AM
    Effect of Financing on Earnings Per Share
    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_________
    Curlyben's Avatar
    Curlyben Posts: 18,481, Reputation: 1857
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    #2

    Oct 16, 2013, 06:31 AM
    What do YOU think ?
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    rehmanvohra's Avatar
    rehmanvohra Posts: 739, Reputation: 27
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    #3

    Oct 17, 2013, 04:41 AM
    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
    kellyrexsun's Avatar
    kellyrexsun Posts: 2, Reputation: 1
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    #4

    Oct 29, 2013, 12:22 PM
    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
    rehmanvohra's Avatar
    rehmanvohra Posts: 739, Reputation: 27
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    #5

    Oct 30, 2013, 12:01 AM
    Quote Originally Posted by kellyrexsun View Post
    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.

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