Folmar Co. is considering the following alternative financing plans: Plan 1 Plan
ID: 2445956 • Letter: F
Question
Folmar Co. is considering the following alternative financing plans:
Plan 1 Plan 2
Issue 10% bonds (at face value) $1,040,000 $520,000
Issue preferred $1 stock, $10 par — 860,000
Issue common stock, $5 par 1,040,000 700,000
Income tax is estimated at 40% of income.
Determine the earnings per share on common stock, assuming income before bond interest and income tax is $624,000.
Enter answers in dollars and cents, rounding to the nearest cent.
Plan 1 $ Earnings per share on common stock
Plan 2 $ Earnings per share on common stock
Explanation / Answer
Plan 1
Income before bond interest and income tax = 624000
Less : Interest Expenses = 1040000*10% = 104000
Income before income tax = $ 520000
Less : Income Tax Expenses = 520000*40% = 208000
Income after income tax = $ 312000
Less : Prefered Stock Dividend = 0
Earning Available to Common Stock holder = $ 312000
No of Common Stock Outstanding = Common Stock/Par Value per share
No of Common Stock Outstanding = 1040000/5
No of Common Stock Outstanding = 208000
Earnings per share on common stock = Earning Available to Common Stock holder /No of Common Stock Outstanding
Earnings per share on common stock = 312000/208000
Earnings per share on common stock = $ 1.50
Plan 2
Income before bond interest and income tax = 624000
Less : Interest Expenses = 520000*10% = 52000
Income before income tax = $ 572000
Less : Income Tax Expenses = 572000*40% = 228800
Income after income tax = $ 343200
Less : Prefered Stock Dividend = 860000/10 * 1 = 86000
Earning Available to Common Stock holder = $ 257200
No of Common Stock Outstanding = Common Stock/Par Value per share
No of Common Stock Outstanding = 700000/5
No of Common Stock Outstanding = 140000
Earnings per share on common stock = Earning Available to Common Stock holder /No of Common Stock Outstanding
Earnings per share on common stock = 257200/140000
Earnings per share on common stock = $ 1.84