Effect of financing on earnings per share advantages and

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Reference no: EM13356098

Effect of financing on earnings per share, Advantages and Disadvantages of each plan.

Three different plans for financing a $10,000,000 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	Plan2	Plan3
10% bonds	____	____	$5,000,000
Preferred 10% stock, $40 par	____	$5,000,000	2,500,000
Common stock, $10 par	$10,000,000	5,000,000	2,500,000
Total	$10,000,000	$10,000,000	$10,000,000

Instructions

1.Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $2,000,000.

2.Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $950,000.

3.Discuss the advantages and disadvantages of each plan.

Reference no: EM13356098

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