Question

Domanico Co., which produces and sells biking equipment, is financed as follows:

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

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) $760,000, (b) $960,000, and (c) $1,160,000.

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

Solution :

a. Earnings per share on common stock $ 1.70 i.e., 1 Dollar and 70 cents

b. Earnings per share on common stock $ 3.20 i.e., 3 Dollars and 20 cents

c. Earnings per share on common stock $ 4.70 i.e., 4 Dollars and 70 cents

Working Notes :

1.Calculation of Bond Interest:

As per the information given in the question we have

Bonds payable, 10 % (issued at face amount) = $ 2,000,000

This implies that rate of Bond Interest = 10 %

Total face value of the Bonds issued = $ 2,000,000

Thus the Bond Interest = Total face value of the Bonds issued * Rate of Bond Interest

= $ 2,000,000 * 10 % = $ 200,000

Thus the Bond Interest = $ 200,000

2.Calculation of Preferred stock Dividend :

As per the information given in the question we have

Total value Preferred Stock issued = $ 2,000,000

Par value of preferred stock = $ 20

Thus the Total No. of shares of preferred stock issued = $ 2,000,000 / $ 20

= $ 100,000

As per the information given in the question

Preferred stock dividend per share = $ 2

Total No. of shares of preferred stock issued = $ 100,000

Thus the total preferred stock dividend i.e., Preference Dividend = Preferred stock dividend per share * Total No. of shares of preferred stock issued

= $ 2 * 100,000

= $ 200,000

Thus the Preference Dividend = $ 200,000

c.Calculation of Number of shares of Common stock :

As per the information given in the question we have

Total value Common Stock issued = $ 2,000,000

Par value of Common stock = $ 25

Thus the Total No. of shares of Common stock issued = $ 2,000,000 / $ 25

= 80,000

No. of shares of Common stock = 80,000

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.

28.02.2020 - Microsoft Excel X FILE 5 HOME B INSERT PAGE LAYOUT FORMULAS DATAREVIEW VIEW A DE H (b) Statement showing calculation of Earnings per share on Common Stock Sl.No. Particulars (a) 1 Income before bond Interest and Income Tax $ 760,000.00 $ 960,000.00 $ 2 Less: Bond Interest $ -200,000.00 -200,000.00 $ 3 Income after bond Interest and before Income Tax $ 560,000.00 $ 760,000.00 $ 4 Less: Income Tax @ 40% = (3)* 40 % $ -224,000.00 $ -304,000.00 $ 5 Net Income after Income Tax $ 336,000.00 $ 456,000.00 $ 6 Less: Preference Dividend $ -200,000.00 $ -200,000.00 $ 7Income after Preference Dividend $ 136,000.00 $ 256,000.00 $ 8 No. of shares of Common Stock 80,000.00 80,000.00 9 Earnings per share on Common Stock = = Income after Preference Dividend / No. of shares of Common Stock $ 1.70 $ 3.20 $ = (7)/(8) 1,160,000.00 -200,000.00 960,000.00 -384,000.00 576,000.00 -200,000.00 376,000.00 80,000.00 4.70