Smith CoIs Considering the Following Alternative Plans for Financing the Company

Essay

Smith Co.is considering the following alternative plans for financing the company: $$\begin{array}{l}&\text { Plan I }&\text { Plan II }\\\text { Issue } 10 \% \text { Bonds (at face) } & - & \$ 1,000,000 \\\text { Issue } \$ 10 \text { Common Stock } & \$ 3,000,000 & \$ 2,000,000\\\text { Income tax is estimated at } 40 \% \text { of income. }\end{array}$$ Determine the earnings per share of common stock under the two alternative financing plans, assuming income before bond interest and income tax is $1,000,000.