KKM Corporation discussed three different plans to finance $4,000,000 toward construction of a new
warehouse. Under each of the following plans the securities will be issued at their par or face value
amount, and the income tax rate is estimated at 25% of income.
Plan#1 Plan#2 Plan#3
Preferred 10% stock $40 Par
Common stock $10 Par 4,000,000 2,000,000 1,000,000
10% Bonds 3,000,000
Total 4,000,000 4,000,000 4,000,000
1. Determine for each plan the earnings per share of common stock, assuming that the income before
bond interest and income tax is $800,000.
2. Determine for each plan the earnings per share of common stock, assuming that the income before
bond interest and income tax is $450,000.
3. Discuss the advantages and disadvantages of each plan.
Problem # 2
Data pertaining to the current position of Jones Company are as follows:
1. Compute (a) the working capital (b) the current ratio, and (c) the quick ratio. Round to one
2. Compute the working capital, current ratio, and quick ratio after each of the following
transactions. Consider each transaction separately and assume that only the transaction affects
the data given above. Round to one decimal place.
A. Sold temporary investment at no gain or loss, $35,000.
B. Paid accounts payable, $40,000.
C. Purchased goods on account, $75,000.
D. Paid notes payable, $30,000.
E. Declared a cash dividend, $15,000.
F. Declared a common stock dividend on common stock, $32,000.
G. Borrowed cash on a long term note, $150,000.
H. Received cash on account, $ 175,000.
I. Paid cash prepaid expenses, $10,000.
Temporary investments 160,000
Accounts/notes receivable (net) 235,000
Prepaid expenses 10,000
Accounts payable 158,000
Notes payable (short term) 80,000
Accrued expenses 12,000