Bonds payable, 8% (issued at face amount) $10,000,000 Preferred $5,$10 par 10,000.000 Common stock, $20 par...

Bonds payable, 8% (issued at face amount) $10,000,000
Preferred $5,$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
a.) 10,500,000
b.) 11,000,000
C.) 13,000,000

Solutions

Expert Solution

Formula of earnings per share of common stock is as follow;

Earning per share (EPS) =

(Earnings available for shareholders / Number of shares)

Let’s calculate EPS with the help of this table;

	(a)	(b)	(c)
Income before interest & tax	$10500000	$11000000	$13000000
Less: Interest on bonds	($800000)	($800000)	($800000)
Income before tax	$9700000	$10200000	$12200000
Less: Income tax @ 40%	($3880000)	($4080000)	($4880000)
Income after tax	$5820000	$6120000	$7320000
Less: Preference dividend	($5000000)	($5000000)	($5000000)
Net income available for common stockholders	$820000	$1120000	$2320000
Number of common shares	500000	500000	500000
Earnings per share (EPS)	$1.64	$2.24	$4.64

Working Note;

1. Interest on bond will be ($10000000 * 8 / 100) = $800000

2. Preference dividend will be ($10000000 / 10) * 5 = $5000000

3. Number of common share will be ($10000000 / $20) = 500000

ekkarill92 answered 8 months ago

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