Three different plans for financing a $20,000,000 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 Plan 2 Plan 3
—– —— 7,000,000
Preferred 8% stock, $40 par
—— 6,000,000 6,000,000
Common stock, $10 par
20,000,000 14,000,000 7,000,000
20,000,000 20,000,000 20,000,000
Net Income (loss)
1. Determine for each plan the earnings per share of common stock, assuming that bond interest and income tax is $1,750,000.
2. Determine for each plan the earnings per share of common stock, assuming that bond interest and income tax is $1,150,000.
3. Discuss the advantages and disadvantages of each plan.
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