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)	$1,100,000
Preferred $2 stock, $20 par	1,100,000
Common stock, $25 par	1,100,000

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) $440,000, (b) $550,000, and (c) $660,000.

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

	a	b	c
Income before bond interest and income tax	440000	550000	660000
Less: Interest expense (1100000*10%)	110000	110000	110000
Income before tax	330000	440000	550000
Income tax expense @40%	132000	176000	220000
Net income	198000	264000	330000
Less: Preferred dividend (1100000*2/20)	110000	110000	110000
Earnings available to common stockholders	88000	154000	220000
No. of common shares (1100000/25)	44000	44000	44000
Earnings per share	$2.0	$3.5	$5.0