Three different plans for financing a $5,400,000 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 |
| 10% bonds |
_ |
|
_ |
|
$2,700,000 |
|
| Preferred 10% stock, $40 par |
_ |
|
$2,700,000 |
|
1,350,000 |
|
| Common stock, $5.40 par |
$5,400,000 |
|
2,700,000 |
|
1,350,000 |
|
|
Total |
$ 5,400,000 |
|
$ 5,400,000 |
|
$ 5,400,000 |
|
1. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $10,800,000. Enter answers in dollars and cents, rounding to the nearest cent.
2. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $5,130,000. Enter answers in dollars and cents, rounding to the nearest cent.
3. Discuss the advantages and disadvantages of each plan.