Name:
Section:
Score: 0%
Key Code:
1.
Maximum yearly total preferred dividend:
Total
Year Dividends Total
Per Share
Total
Per Share
128,000$
2.
Average annual dividend for preferred:
Average annual dividend for common:
Return on initial investment, preferred:
Return on initial investment, common:
Preferred Dividends
Common Dividends
Problem 8-5
Instructions
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2
Name:
Section:
Score:
Scoring:
1.
Maximum yearly total preferred dividend: 52,000$
Total
Year Dividends Total
Per Share
Total
Per Share
128,000$ 28,000$ $0.70 –$ $0.00
244,000 44,000 1.10 – 0.00
348,000 48,000 1.20 – 0.00
460,000 52,000 1.30 8,000 0.16
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Problem 8-5
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ON
SOLUTION
Preferred Dividends
Common Dividends
Instructions
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Name:
Section:
Score: 0%
Key Code:
1. Plan 1 Plan 2 Plan 3
Earnings before interest and income tax
Deduct interest on bonds
2. Plan 1 Plan 2 Plan 3
Earnings before interest and income tax
Deduct interest on bonds
3. Plan 1:
Plan 2:
Plan 3:
2
Problem 8-6
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Scoring:
1. Plan 1 Plan 2 Plan 3
Earnings before interest and income tax 1,000,000$ 1,000,000$ 1,000,000$
Deduct interest on bonds – – 200,000
2. Plan 1 Plan 2 Plan 3
Earnings before interest and income tax 300,000$ 300,000$ 300,000$
Deduct interest on bonds – – 200,000
3. Plan 1:
Plan 2:
Plan 3:
Plan 3 does not require a large investment by stockholders, and it has the largest EPS if business conditions are favorable. However, its EPS is the lowest if conditions are
Problem 8-6
SOLUTION
Plan 1 does not require a periodic interest payment or a payment of preferred dividends, and it has the largest EPS if business conditions are poor. However, its EPS is the
lowest if conditions are favorable.
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ON
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Plan 2 does not require a periodic interest payment, and does not require such a large investment by common stockholders. The EPS do not vary as much as the other plans
as business conditions change.