Income tax is estimated at 40% of income. When evaluating alternative financing plans, factors other than earnings per share to consider include that bonds represent a fixed annual interest requirement unlike stock dividends, dividends reduce retained earnings, and net income is reduced by dividend expense.

1. 14
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.
Solution
Solution - a) Interest on bonds has to be paid no matter if the performance of the company is
good where as there is no such compulsion to pay dividends on common stock.