Answer:
1st Plan Earning per Share $ 1.80
2nd Plan Earning per Share $ 2.30
<em>The Second Plan provides better earnings per share.</em>
Explanation:
1st Plan:
Income before Interest and taxes 1,008,000
Bonds Payable Interest: <u> (144,000) </u>
Income before taxes 864,000
Income tax expense <u> (345,600) </u>
Net Income 518,400
<u>Quantity of Common Stock:</u>
$ 1,440,000 / $5 = 288,000
Earing per share:
518,400 / 288,000 = $1.80
2nd Plan:
Income before Interest and taxes 1,008,000
Bonds Payable Interest: <u> (72,000) </u>
Income before taxes 936,000
Income tax expense <u> (374,400) </u>
Net Income 561,600
Preferred Shares Dividends (120,000)
Available for common stock 441,600
<u>Quantity of preferred Stock:</u>
$1,200,000 / $10 =120,000 shares
Dividends on Preferred Shares:
120,000 x $1 = 120,000
<u>Quantity of Common Stock:</u>
$ 960,000 / $5 = 192,000
Earing per share:
441,600 / 192,000 = $2.30
