Alternative Financing Plans Frey Co. is considering the following alternative financing plans: Plan 1 Plan 2 Issue 5% bonds (at face value) $6,000,000 $2,000,000 Issue preferred $1 stock, $20 par - 6,000,000 Issue common stock, $25 par 6,000,000 4,000,000 Income tax is estimated at 40% of income. Determine the earnings per share of common stock, assuming income before bond interest and income tax is $800,000. Enter answers in dollars and cents, rounding to the nearest whole cent. Plan 1 $ Earnings per share on common stock Plan 2 $ Earnings per share on common stock

Plan 1 = $1.25

Plan 2 = $0.75

Explanation:

Particulars Plan 1 Plan 2

5% Bonds $6,000,000 $2,000,000

Pref Stock $20 par $6,000,000

Equity $25 par $6,000,000 $4,000,000

Provided earnings before bond interest and income tax = $800,000

Earnings $800,0000 $800,000

Less:Bond interest @5% ($300,000) ($100,000)

Earnings after bond interest 500,000 $700,000

Less: Taxes @40% ($200,000) ($280,000)

Earnings after Taxes $300,000 $420,000

Less: Pref dividend Assumed rate @5%

NIL ($300,000)

Earnings for equity $300,000 $120,000

Number of shares 240,000 160,000

Earnings Per Share $1.25 $0.75

Number of shares = $6,000,000/25 = 240,000 Plan 1

Number of shares = $4,000,000/25 = 160,000 Plan 2

Plan 1 = $1.25

Plan 2 = $0.75