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1.
Plan 1 Plan 2 Plan 3
Earnings before bond interest and income tax
Bond interest
Income before income tax
Income tax
Net income
Dividends on preferred stock
Earnings available for common stock
Shares of common stock outstanding
Earnings per share on common stock
2.
Plan 1 Plan 2 Plan 3
Earnings before bond interest and income tax
Bond interest
Income before income tax
Income tax
Net income
Dividends on preferred stock
Earnings available for common stock
Shares of common stock outstanding
Earnings per share on common stock
3.
Problem 14-1B
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Earnings per Share of Common Stock
(Key essay answer here)
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Instructions
Earnings per Share of Common Stock
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1.
Plan 1 Plan 2 Plan 3
Earnings before bond interest and income tax 10,000,000$ 10,000,000$ 10,000,000$
Bond interest – – 3,600,000
Instructions
interest in the company. Also, if earnings before interest and income tax is $10,000,000, this plan offers
the lowest EPS ($1.50) on common stock.
The principal advantage of Plan 3 is that little additional investment would need to be made by common
shareholders for them to retain their current interest in the company. Also, it offers the largest EPS
($2.84) if earnings before interest and income tax is $10,000,000. Its principal disadvantage is that the
bonds carry a fixed annual interest charge and require the payment of principal. It also requires a
dividend payment to preferred stockholders before a common dividend
can be paid. Finally, Plan 3 provides the lowest EPS ($0.44) if earnings before interest and income
tax is $6,000,000.
Plan 2 provides a middle ground in terms of the advantages and disadvantages described in the
preceding paragraphs for Plans 1 and 3.
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Earnings per Share of Common Stock
Problem 14-1B
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Plan 1 Plan 2 Plan 3
The principal advantage of Plan 1 is that it involves only the issuance of common stock, which does not
require a periodic interest payment or return of principal, and a payment of preferred dividends is not