Frey Co. is considering the following alternative financing plans: Plan 1 Plan 2 Issue 10% bonds (at face value) $1,080,000 $540,000 Issue preferred $1 stock, $10 par - 900,000 Issue common stock, $5 par 1,080,000 720,000 Income tax is estimated at 40% of income. Determine the earnings per share on common stock, assuming that income before bond interest and income tax is $756,000. Enter answers in dollars and cents, rounding to two decimal places. Plan 1 $ Earnings per share on common stock Plan 2 $ Earnings per share on common stock

Answer and Explanation:

Particulars Plan 1 Plan 2

Income before interest and tax $756,000 $756,000

Less: Interest expenses - 108,000 - 54,000

($1,080,000 * 10%) ($540,000 * 10%)

Income before tax $648,000 $702,000

Less: Income tax expense - $259,200 - $280,800

($648,000 * 40%) ($702,000 * 40%)

Net income $388,800 $421,200

Less: Preferred dividend $0 - $90,000

Profit available for common stockholder's (A) $388,800 $331,200

Divided by Number of common shares (B) 216,000 $144,000

($1,080,000 : $5) ($720,000 : $5)

Earning per share (A) : (B) $1.8 $2.3

By dividing the profit by the number of shares we can get the earning per share and the same is shown above