Effect of Financing on Earnings per Share Domanico Co., which produces and sells biking equipment, is financed as follows:

Question

Bonds payable, 8% (issued at face amount) $10,000,000 Preferred $5 stock, $10 par 10,000,000 Common stock, $20 par 10,000,000 Income tax is estimated at 40% of income. Determine the earnings per share of common stock, assuming that the income before bond interest and income tax is (a) $10,500,000, (b) $11,800,000, and (c) $13,000,000. Enter answers in dollars and cents, rounding to the nearest whole cent. a. Earnings per share on common stock $ b. Earnings per share on common stock $ c. Earnings per share on common stock

Answer 1

Income before interest and tax . . . 10,500,000

Less interest expense . . . . . . . . .. .80,000

Income before tax . . . . . . . .. . . . .10,420,000

Less tax . .at 40% . . . . . . . . . . 4,168,000

Net income   . . . . . . . . . . . . . 6,252,000

 

Preferred dividend = $5,000,000

Common share income = 1,252,000

EPS  1,252,000 / 500,000 shares = $2.504

 

The calculations for each option are the same.