Question

Effect of Financing on Earnings Per Share BSF Co., which produces and sells skiing equipment, is financed as follows: Bonds payable, 10% (issued at face amount) $1,250,000 Preferred 2% stock, $20 par 1,250,000 Common stock, $25 par 1,250,000 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 $412,500. $ per share

b. Determine the earnings per share of common stock, assuming that the income before bond interest and income tax is $537,500. $ per share

c. Determine the earnings per share of common stock, assuming that the income before bond interest and income tax is $662,500. $ per share

Answer 1

the following table presents the three situations:

Particulars	EBIT =$412,500	EBIT =$537,500	EBIT=$662,500
EBIT	$412,500	$537,500	$662,500
less: interest on bonds (10%*1,250,000)	(125,000)	(125,000)	(125,000)
Income before tax	$287,500	$412,500	$537,500
less tax @60%	$172,500	$247,500	$322,500
income after tax	$115,000	$165,000	$215,000
less: preferred dividend (1,250,000*2%)	$25,000	$25,000	$25,000
net income available to common stock holders	$90,000	$140,000	$190,000
number of common stock ($1,250,000/$25)=>	50,000	50,000	50,000
earnings per share (net income available to common stock holders / number of common stock)	$1.80	$2.80	$3.80