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1) Wilkinson Co. is considering the following alternative financing plans.
Plan 1 Plan 2
$1,000,000 $500,000
———– 700,000
1,000,000 800,000
Issue 12% bonds (at face value)
Issue preferred $2 stock, $10 per share
Issue common stock, $10

Income tax is estimated at 40% of income.
Determine the earnings per share of common stock, assuming income before bond interest and income tax is $400,000.

2) Three different plans for financing a #30,000,000 corporation are under consideration by its organizers. Under each of the following plans, the securities will be issued at their par or face amt, and the income tax rate is estimated 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

Instructions
1) Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $20,000,000.
2) Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $2,600,000.
3) Discuss the advantages and disadvantages of each plan.
4) 3) The following selected transactions relate to certain securities acquired by Wildflower Blueprints Inc., whose fiscal year ends on Dec 31:
2007
Sept 1. Purchased $600,000 of Wilson Co 20-year, 10% bonds dated July 1, 2007, directly from the issuing co, for $578,580 plus accrued interest of $10,000.
Dec 31. Received the semiannual interest on the wilson co bonds.
31. Recorded bond discount amortization of $360 on the wilson company bonds.
The amortization amount was determined by using the straight-line method.

(Assuming that all intervening transactions and adjustments have been properly recorded and that the number of bonds owned has not changed from Dec. 31, 2007, to Dec 31, 2011.)

2012
June 30. Received the semiannual interest on the wilson co bonds.
Oct 31. Sold one-half of the wilson co bonds at 97 plus accrued interest. The broker deducted $400 for commission, etc., remitting the balance. Prior to the sale, $450 of discount on one-half of the bonds was amortized, reducing the carrying amount of those bonds to $292,080.
Dec 31. Received the semiannual interest on the wilson co bonds.
31. Recorded bond discount amortization of $540 on the wilson co bonds.