discuss the advantages and disadvantages of each plan 554466
PR 14-1A Effect of financing on earnings per share
Three different plans for financing a $200,000,000 corporation are under consideration
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discuss the advantages and disadvantages of each plan 554466
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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 |
|
|
11% bonds |
— |
— |
$100,000,000 |
|
Preferred 5% stock, $40 par |
— |
$100,000,000 |
50,000,000 |
|
Common stock, $25 par |
$200,000,000 |
100,000,000 |
50,000,000 |
|
Total |
$200,000,000 |
$200,000,000 |
$200,000,000 |
Instructions
1. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $30,000,000.
2. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $16,000,000.
3. Discuss the advantages and disadvantages of each plan.
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