Answer:
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
