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)	$1,050,000
Preferred $2 stock, $20 par	1,050,000
Common stock, $25 par	1,050,000

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) $399,000, (b) $504,000, and (c) $609,000.

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 $ ____

Answer 1

a
Income before bond interest and income tax	399000
Less: Bond interest expense	105000
Income before income tax	294000
Less: Income tax expense 40%	117600
Net income	176400
Less: Preferred Dividends	105000	=(1050000/20)*2
Net income for Common Stockholders	71400
Divide by Common Shares outstanding	42000	=1050000/25
Earnings per share on common stock	1.70
b
Income before bond interest and income tax	504000
Less: Bond interest expense	105000
Income before income tax	399000
Less: Income tax expense 40%	159600
Net income	239400
Less: Preferred Dividends	105000
Net income for Common Stockholders	134400
Divide by Common Shares outstanding	42000
Earnings per share on common stock	3.20
c
Income before bond interest and income tax	609000
Less: Bond interest expense	105000
Income before income tax	504000
Less: Income tax expense 40%	201600
Net income	302400
Less: Preferred Dividends	105000
Net income for Common Stockholders	197400
Divide by Common Shares outstanding	42000
Earnings per share on common stock	4.70