Smith CoIs Considering the Following Alternative Plans for Financing the Company

question 6

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.

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Definitions:

Inflation Rate

The percentage rate at which the general level of prices for goods and services is rising, leading to a decrease in the purchasing power of currency.

Inflation Rate

The percentage increase in the general price level of goods and services in an economy over a period of time, usually a year.

Market Basket

A selected set of goods and services used to track an economy's inflation or cost of living over time.

CPI

The Consumer Price Index scrutinizes the average price changes of a broad spectrum of consumer items and services, like food, healthcare, and transport, by means of a weighted average calculation.