Smith Co Is Considering the Following Alternative Plans for Financing the the Company

question 80

Essay

Smith Co. is considering the following alternative plans for financing the company:
$\begin{array}{|l|l|l|}\hline\text { Plan II } & \text { PlanI } & \\\hline \$ 1,000,000 & - & \text { Issue } 10 \% \text { Bonds (at face) } \\\hline \$ 2,000,000 & \$ 3,000,000 & \text { Issue } \$ 10 \text { Common Stock } \\\hline\end{array}$
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 $1,000,000.

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Definitions:

Market Portfolio

A theoretical portfolio of all investable assets, weighted by market capitalization, that represents the entire market.

World Equities

Shares in companies located around the globe, representing ownership across different countries and industries.

Risk-free Rate

The Risk-free Rate is the theoretical return on an investment with no risk of financial loss, typically represented by government bonds.

Future Exchange Rate

An agreed exchange rate for currencies to be exchanged on a predetermined future date, used in futures contracts.