. McLinden Corp. is considering financing $10,000,000 of its upcoming operations

Question

. McLinden Corp. is considering financing $10,000,000 of its upcoming operations by issuing equity and bonds. McLinden is considering issuing $1,000,000 of 10%, $10 par Preferred stock, $4,000,000 of $1 par Common stock, and $5,000,000 of 12% 5 year bonds. Assume that the income before bond interest and income tax is $4,000,000. The tax rate is 40%.<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Determine the Earnings per Share calculation for the first year if McLinden finances in this manner. Use the table given below:

Earnings before interest & income tax

deduct interest on bonds

income before income tax

less: income tax

net income

dividends on prefeffed stock

avialable for dividends on common stock

shares of common stock oustanding

earnings per share on common stock

Explanation / Answer

Earnings before interest and income tax is 4,000,000

interest on bonds is 5,000,000 * 0.12 = 600,000

income before income tax is 3,400,000

income tax is 0.4 * 3400000 = 1360000

net income = 2040000

dividends on preffered stock is 0.1 * 1,000,000 = 100,000

available for dividends on common stock = 1940000

shares of commonm stock is 4,000,000

earnings per share = 1940000 / 4000000 = 0.485

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