Question

Effect of Financing on Earnings per Share Domanico Co., which produces and sells biking equipment, is financed as follows: Bonds payable, 8% (issued at face amount) $10,000,000 Preferred $5 stock, $10 par 10,000,000 Common stock, $20 par 10,000,000 Income tax is estimated at 40% of income. Determine the earnings per share of common stock, assuming that the income before bond interest and income tax is (a) $10,500,000, (b) $11,800,000, and (c) $13,000,000. Enter answers in dollars and cents, rounding to the nearest whole cent. a. Earnings per share on common stock $ b. Earnings per share on common stock $ c. Earnings per share on common stock $

Answer 1

SOLUTION

(A)

	Amount ($)
Earnings before bond interest and income tax	10,500,000
Less: Bond interest (10,000,000 * 8%)	800,000
Balance	9,700,000
Less: Income tax (40%)	3,880,000
Net income	5,820,000
Less: Dividends on preferred stock (10,000,000 / $10 * $5)	5,000,000
Earnings available for common stock (A)	820,000
Shares of common stock outstanding (10,000,000 / 20) (B)	500,000
Earnings per share on common stock	1.64

(B)

	Amount ($)
Earnings before bond interest and income tax	11,800,000
Less: Bond interest (10,000,000 * 8%)	800,000
Balance	11,000,000
Less: Income tax (40%)	4,400,000
Net income	6,600,000
Less: Dividends on preferred stock (10,000,000 / $10 * $5)	5,000,000
Earnings available for common stock (A)	1,600,000
Shares of common stock outstanding (10,000,000 / 20) (B)	500,000
Earnings per share on common stock	3.2

(C)

	Amount ($)
Earnings before bond interest and income tax	13,000,000
Less: Bond interest (10,000,000 * 8%)	800,000
Balance	12,200,000
Less: Income tax (40%)	4,880,000
Net income	7,320,000
Less: Dividends on preferred stock (10,000,000 / $10 * $5)	5,000,000
Earnings available for common stock (A)	2,320,000
Shares of common stock outstanding (10,000,000 / 20) (B)	500,000
Earnings per share on common stock	4.64