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Does anyone know about bonds and bonds payable?

edited November 2010 in Human Resources
Plan A Borrow At 6% Plan B Issue Common Stock Plan C Issue $2.50 Nonvoting Preferred Stock
Net income before new project $1,200,000 $1,200,000 $1,200,000
Expected income on the new project before
interest and income tax expenses
Less: Interest expense ($4,000,000 x 6%) 240,000 0
Project income before income tax 760,000 1,000,000
Less: Income tax expense (40%) 304,000 400,000
Project net income 456,000 600,000
Net income with new project $1,656,000 $1,800,000
Earnings per share with new project:
Plan A ($1,656,000/400,000) $4.14
Plan B ($1,800,000/500,000) $3.60
Plan C ($1,656,000/ $3.88

This is the worksheet that we are to follow, I have used the figures that we were given, however, Plan C is supposed to have $3.88 for the EPS (Earnings per share), I can not for the life of me, come up with the correct answer. Can anyone tell me where I am going wrong, or what I am doing wrong?

Thank you in advance for any and all information that you can provide.


  • Are the preferred shares convertible? Is EPS fully diluted? Or were some Pref shares converted? OR additional common shares issued in option C?
    I take it that $4,000,000 of preferred shares are issued (40.000 @ $100 par) and at $2.50 the total Pref Div are $100,000. So common net income is $1,800,000 - $100,000 = $1,700,000. This is divided by 400,000 common shares to get $4.25 EPS - to get $3.88 there would need to be 438,144 common shares outstanding.

    Could be an error in the check figure. That happens more than you would think.