Desmond Co. is considering the following alternative financing plans: Plan 1 Plan 2 Issue 5% bonds (at face value) $3,000,000 $1,000,000 Issue preferred $1 stock, $20 par — 3,000,000 Issue common stock, $10 par 3,000,000 2,000,000 Income tax is estimated at 40% of income. Determine the earnings per share of common stock, assuming that income before bond interest and income tax is $400,000.

Desmond Co. is considering the following alternative financing plans: Plan 1 Plan 2 Issue 5% bonds (at face value) $3,000,000 $1,000,000 Issue preferred $1 stock, $20 par — 3,000,000 Issue common stock, $10 par 3,000,000 2,000,000 Income tax is estimated at 40% of income. Determine the earnings per share of common stock, assuming that income before bond interest and income tax is $400,000.

Financial Accounting

14th Edition

ISBN:9781305088436

Author:Carl Warren, Jim Reeve, Jonathan Duchac

Publisher:Carl Warren, Jim Reeve, Jonathan Duchac

Chapter14: Long-term Liabilities: Bonds And Notes

Section: Chapter Questions

Problem 1PEA

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Sorenson Co. is considering the following alternative plans for financing the company: Plan 1 Plan 2 Issue 10% Bonds (at face) - $80,000 Issue $10 par Common Stock $120,000 $40,000 Income tax is estimated at 40% of income. Determine the earnings per share of common stock under the two alternative financing plans, assuming income before bond interest and income tax is $30,000. Round your answers to two decimal places.
Simonelli Co. is considering the following alternative financing plans: Plan 1 Plan 2 Issue 8% bonds (at face value) $5,000,000 4,000,000 Issue preferred $2.00 stock, $20 par — 2,000,000 Issue common stock, $25 par 5,000,000 4,000,000 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 $1,000,000.
Assume that Western Asset Management Company LLC (WAMC) has $10,000 par value zero-coupon bonds outstanding. WAMC bonds are currently trading at $5,500 with 8 years to maturity. WAMC tax bracket is 35%. Calculate the cost of debt for WAMC (System will not accept percentage (%) sign, therefore write your answer upto four decimals).
Consider the following information for Watson Power Company: Debt: Common stock: Preferred stock: Market: Find the WACC. 2,000 7 percent coupon bonds outstanding, $1,000 par value, 19 years to maturity, selling for 104 percent of par; the bonds make semiannual payments. Assume the company's tax rate is 34 percent. Multiple choice: A) 10.18% B) 10.68% C) 11.09% D) 10.28% E) 10.42% 48,000 shares outstanding, selling for $63 per share; the beta is 1.16. 6,500 shares of 6.5 percent preferred stock outstanding, currently selling for $106 per share. 8 percent market risk premium and 6 percent risk-free rate.
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A Corporation believes that it can sell long term-bonds with an 8% coupon rate, although the effective rate is 10%. If such bonds are part of A Corporation’s financing plans for next year, what is the after-tax (30% tax rate) cost of bonds for purposes of calculating the corporation’s cost of capital. A. 5.44% B. 7% C. 10% D. 14.00%
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	Plan 1	Plan 2
Issue 5% bonds (at face value)	$3,000,000		$1,000,000
Issue preferred $1 stock, $20 par	—		3,000,000
Issue common stock, $10 par	3,000,000		2,000,000