Ulmer Company is considering the following alternative financing plans: Plan 1 Plan 2 Issue 8% bonds at face value $2,000,000 $1,000,000 Issue preferred stock, $15 par - 1,500,000 Issue common stock, $10 par 2,000,000 1,500,000 Income tax is estimated at 35% of income. Dividends of $1 per share were declared and paid on the preferred stock. Required: Determine the earnings per share of common stock, assuming income before bond interest and income tax is $600,000. Round your answers to two decimal places

PLAN 1 PLAN 2

$ $

Earnings before interest and tax 600,000 600,000

Less: Interest on debt 160,000 80,000

Profit before tax 440,000 520,000

Less: tax @ 35% 154,000 182,000

Profit after tax 286,000 338,000

Less: Preferred dividend 100,000 100,000

Profit available for distribution 186,000 238,000

Earnings per share

= Profit available for distribution 186,000 238,000

No of common stocks outstanding 200,000 150,000

$0.93/share $1.59/share

Explanation:

In the question, we need to determine profit available for distribution, which is earnings before interest and tax less interest on debt less tax less preference dividend. Then, we will divide the profit available for distribution by number of common stocks outstanding. The number of common stock outstanding is face value of common stock divided by par value per unit. Preferred dividend is the product of preferred dividend per share and number of preferred stocks outstanding. The number of preferred stocks outstanding is the face value of preferred stocks divided by par value of preferred stock per unit.