Question

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)	$2,150,000
Preferred $2 stock, $20 par	2,150,000
Common stock, $25 par	2,150,000

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) $924,500, (b) $1,139,500, and (c) $1,354,500.

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 $

Answer 1

a
Income before bond interest and income tax	924500
Less: Bond interest expense	215000
Income before income tax	709500
Less: Income tax expense 40%	283800
Net income	425700
Less: Preferred Dividends	215000	=(2150000/20)*2
Net income for Common Stockholders	210700
Divide by Common Shares outstanding	86000	=2150000/25
Earnings per share on common stock	2.45
b
Income before bond interest and income tax	1139500
Less: Bond interest expense	215000
Income before income tax	924500
Less: Income tax expense 40%	369800
Net income	554700
Less: Preferred Dividends	215000
Net income for Common Stockholders	339700
Divide by Common Shares outstanding	86000
Earnings per share on common stock	3.95
c
Income before bond interest and income tax	1354500
Less: Bond interest expense	215000
Income before income tax	1139500
Less: Income tax expense 40%	455800
Net income	683700
Less: Preferred Dividends	215000
Net income for Common Stockholders	468700
Divide by Common Shares outstanding	86000
Earnings per share on common stock	5.45