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)	$800,000
Preferred $2 stock, $20 par	800,000
Common stock, $25 par	800,000

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) $320,000, (b) $400,000, and (c) $480,000.

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

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Statement showing Computations
Particulars	a) 320,000
EBIT	320,000.00
Less Interest on Bond = 800,000 * 10%	80,000.00
EBT	240,000.00
Less Income tax at 40%	96,000.00
EAT	144,000.00
Less Preferred Dividend = 800,000/20*2	80,000.00
Earning for common stock shareholders	64,000.00
Common Stock shares = 800,000/25	32,000.00
Earnings per share on common stock	2.00
b)
Particulars	b) 400,000
EBIT	400,000.00
Less Interest on Bond = 800,000 * 10%	80,000.00
EBT	320,000.00
Less Income tax at 40%	128,000.00
EAT	192,000.00
Less Preferred Dividend = 800,000/20*2	80,000.00
Earning for common stock shareholders	112,000.00
Common Stock shares = 800,000/25	32,000.00
Earnings per share on common stock	3.50
c)
Particulars	c) 480,000
EBIT	480,000.00
Less Interest on Bond = 800,000 * 10%	80,000.00
EBT	400,000.00
Less Income tax at 40%	160,000.00
EAT	240,000.00
Less Preferred Dividend = 800,000/20*2	80,000.00
Earning for common stock shareholders	160,000.00
Common Stock shares = 800,000/25	32,000.00
Earnings per share on common stock	5.00