Evaluate Alternative Financing Plans
Domanico Co., which produces and sells biking equipment, is financed as follows:
Bonds payable, 6% (issued at face amount) $5,000,000
Preferred $2.00 stock, $100 par 5,000,000
Common stock, $25 par 5,000,000
Income tax is estimated at 40% of income.
What factors other than earnings per share should be considered in evaluating alternative financing plans?
a.Bonds represent a fixed annual interest requirement, while dividends on stock do not.
b.Dividends reduce retained earnings.
c.Bond holders exercise control over board of directors decisions.
d.Stock must be paid annual dividends.
e.Net income is reduced by dividend expense.
