Question

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Effect of Financing on Eamings Per Share BSF Co., which produces and sells sking equipment, is financed as follows: Bonds payable, 10% (issued at face amount) Preferred 2% stock, $20 par Common stock, $25 par Income tax is estimated at 60% of income. Round your answers to the nearest cent a. Determine the earnings per share of common stock, assuming that the income before bond interest and income tax is $459,000. $1,350,000 1,350,000 1,350,000 X per share b. Determine the earnings per share of common stock, assuming that the income before bond interest and income tax is $594,000. X per share c. Determine the earnings per share of common stock, assuming that the income before bond interest and income tax is $729,000. X per share

Answer 1

Solution a:

Computation of Earnings available for Common stock
Net Income Before Interest and Tax	$4,59,000
Less: Bonds Interest ($1,350,000*10%)	$1,35,000
Income Before Tax	$3,24,000
Less: Income Tax (60%)	$1,94,400
Net Income after Tax	$1,29,600
Less: Preferred Dividend ($1,350,000*2%)	$27,000
Earnings available for Common Stock	$1,02,600

Number of Common shares = $1,350,000 / $25 = 54000 shares

Earning per share = Earnings available for Common Stock / Number of Common shares = $102,600 / 54000 = $1.90

Solution b:

Computation of Earnings available for Common stock
Net Income Before Interest and Tax	$5,94,000
Less: Bonds Interest ($1,350,000*10%)	$1,35,000
Income Before Tax	$4,59,000
Less: Income Tax (60%)	$2,75,400
Net Income after Tax	$1,83,600
Less: Preferred Dividend ($1,350,000*2%)	$27,000
Earnings available for Common Stock	$1,56,600

Earning per share = Earnings available for Common Stock / Number of Common shares = $156,600/ 54000 = $2.90

Solution c:

Computation of Earnings available for Common stock
Net Income Before Interest and Tax	$7,29,000
Less: Bonds Interest ($1,350,000*10%)	$1,35,000
Income Before Tax	$5,94,000
Less: Income Tax (60%)	$3,56,400
Net Income after Tax	$2,37,600
Less: Preferred Dividend ($1,350,000*2%)	$27,000
Earnings available for Common Stock	$2,10,600

Earning per share = Earnings available for Common Stock / Number of Common shares = $210,600/ 54000 = $3.90