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) $1,750,000 Preferred $1 stock, $10 par 1,750,000 Common stock, $25 par 1,750,000 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) $630,000, (b) $805,000, and (c) $980,000. Enter answers in dollars and cents, rounding to the nearest cent. a. Earnings per share on common stock $ b. Earnings per share on common stock $ c. Earnings per share on common stock $

Answer 1

Solution:

Computation of Earning per share - Domanico Co
Particulars	Alternative A	Alternative B	Alternative C
Income before interest and tax	$630,000.00	$805,000.00	$980,000.00
Less: Bond interest expense	$175,000.00	$175,000.00	$175,000.00
Income before taxes	$455,000.00	$630,000.00	$805,000.00
Income tax (40%)	$182,000.00	$252,000.00	$322,000.00
Income after taxes	$273,000.00	$378,000.00	$483,000.00
Preference dividend	$175,000.00	$175,000.00	$175,000.00
Earning for common stockholders	$98,000.00	$203,000.00	$308,000.00
Nos of shares outstanding	70000	70000	70000
Earning per share (EPS)	$1.40	$2.90	$4.40