Q1) Three different plans for financing a $30,000,000 corporation are under consideration by its organizers. Under each of the given plans, securities will be issued at their par or face amount, and income tax rate is evaluated at 40% of income.
| |
Plan 1 |
Plan 2 |
Plan 3 |
| 8% bonds |
- |
- |
$20,000,000 |
| Preferred $2 stock, $50 par |
- |
$20,000,000 |
10,000,000 |
| Common stock, $10 par |
$40,000,000 |
20,000,000 |
10,000,000 |
| Total |
$40,000,000 |
$40,000,000 |
$40,000,000 |
Questions:
1. Find out for each plan earnings per share of common stock, suppose that income before bond interest and income tax is $20,000,000.
2. Find out for each plan earnings per share of common stock, suppose that income before bond interest and income tax is $2,600,000.
3. Describe advantages and disadvantages of each plan.