Question

BSF Co., which produces and sells skiing equipment, is financed as follows:

Bonds payable, 10% (issued at face amount) $2,200,000

Preferred 1% stock, $10 par 2,200,000

Common stock, $25 par 2,200,000

Income tax is estimated at 60% of income. Round your answers to the nearest cent.

a. Determine the earnings per share of common stock, assuming that the income before bond interest and income tax is $814,000. ？ per share

b. Determine the earnings per share of common stock, assuming that the income before bond interest and income tax is $1,034,000. ？ per share

c. Determine the earnings per share of common stock, assuming that the income before bond interest and income tax is $1,254,000. ？ per share

Answer 1

Earnings per share of common stock, when the income before bond interest and income tax is calculated as follows:

	a	b	c
Income before bond interest and income tax	$814,000	$1,034,000	$1,254,000
Less: Bond interest (10%)	220,000	220,000	220,000
Income after bond interest and before income tax	594,000	814,000	1,232,000
Income tax (60%)	356,400	488,400	620,400
Income before bond interest and income tax	$237,600	$ 325,600	$413,600

Number of the common stock holders = 2,200,000 / $25

                                                      = 88,000 Shares

a) Earnings per share of common stock = (Net Income - Preference dividend) / Number of outstanding common shares.

                                                            = ( $237,600 - (2,200,000 * 1%) / 88,000 Shares

                                                             = ( $237,600 - 22,000) / 88,000 Shares

                                                              = $215,600 / 88,000 Shares

                                                              = $2.45

b) Earnings per share of common stock = (Net Income - Preference dividend) / Number of outstanding common shares.

                                                            = ( $325,600 - (2,200,000 * 1%) / 88,000 Shares

                                                           = ( $325,600 - 22,000) / 88,000 Shares

                                                           = $303,600 / 88,000 Shares

                                                           = $3.45

c) Earnings per share of common stock = (Net Income - Preference dividend) / Number of outstanding common shares.

                                                            = ( $413,600 - (2,200,000 * 1%) / 88,000 Shares

                                                           = ( $413,600- 22,000) / 88,000 Shares

                                                           = $391,600 / 88,000 Shares

                                                           = $4.45