question archive Effect of Financing on Earnings per Share Domanico Co
Effect of Financing on Earnings per Share Domanico Co
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Effect of Financing on Earnings per Share Domanico Co., which produces and sells biking equipment, is financed as follows: Bonds payable, 10% (issued at face amount) $2,500,000 Preferred $2 stock, $20 par 2,500,000 Common stock, $25 par 2,500,000 Income tax is estimated at 40% of income. Determine the earnings per share on common stock, assuming that the income before bond interest and income tax is (a) $1,175,000, (b) $1,425,000, and (c) $1,675,000. Enter answers in dollars and cents, rounding to two decimal places. a. Earnings per share on common stock b. Earnings per share on common stock c. Earnings per share on common stock $
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Answer :
| a. Earnings per share on common stock | $ 3.05 | ||
| b. Earnings per share on common stock | $ 4.55 | ||
| c. Earnings per share on common stock | $ 6.05 | ||
| Working : | |||
| Calculation of earning per share on common stock | |||
| a. | b. | c. | |
| Earnings before bond interest and income tax | 1175000 | 1425000 | 1675000 |
| Less : Bond interest ( 10% of 2500000 ) | -250000 | -250000 | -250000 |
| Earnings before income tax | 925000 | 1175000 | 1425000 |
| Less : Income tax ( 40% ) | -370000 | -470000 | -570000 |
| Net Income | 555000 | 705000 | 855000 |
| Less : Dividends on preferred stock ( 2500000/20 )* $2 | -250000 | -250000 | -250000 |
| Earnings available for common stock (a) | 305000 | 455000 | 605000 |
| Number of common stock outstanding ( 2500000 / 25 ) ( b) | 100000 | 100000 | 100000 |
| Earning per share on common stock ( a/b) | 3.05 | 4.55 | 6.05 |
