Question

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

Bonds payable, 10% (issued at face amount)$1,100,000Preferred $2 stock, $20 par1,100,000Common stock, $25 par1,100,000

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) $330,000, (b) $440,000, and (c) $550,000.

Enter answers in dollars and cents, rounding to the nearest cent.

Answer 1

Solution:

Calculation of Earnings per share

	(a)	(b)	(c )
Income before interest and income tax	$330,000	$440,000	$550,000
Less: Interest on Bonds Payable (10%*$1,100,000)	$110,000	$110,000	$110,000
Income before income tax	$220,000	$330,000	$440,000
Less: Income tax @ 40%	$88,000	$132,000	$176,000
Income after tax	$132,000	$198,000	$264,000
Less: Preferred Dividends (Number of Shares 55,000*$2)	$110,000	$110,000	$110,000
Income attributable to common stockholders	$22,000	$88,000	$154,000
Divided by Number of Common Stock/Shares	44000	44000	44000
Earnings Per Share	$0.50	$2.00	$3.50

Number of Preference Shares
Total Preferred Share Capital	$1,100,000
Divided by Par Value per share	$20
Number of Preference Share	55000
Number of Common Shares
Total Common Share Capital	$1,100,000
Divided by Par Value per share	$25
Number of Common Share	44000