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Question - Effect of Financing on Earnings Per Share - Three different plans for financing an $4,700,000 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
Plan 2
Plan 3
10% Bonds
_
$2,350,000
Preferred 10% stock, $40 par
1,175,000
Common stock, $4.7 par
$4,700,000
2,350,000
Total
Required -
1. Determine the earnings per share of common stock for each plan, assuming that the income before bond interest and income tax is $9,400,000.
2. Determine the earnings per share of common stock for each plan, assuming that the income before bond interest and income tax is $4,465,000.
3. The principal advantage/disadvantage 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 is not required.
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