Bliss Co., which produces and sells skiing equipment, isfinanced as follows: Bon
ID: 2457687 • Letter: B
Question
Bliss Co., which produces and sells skiing equipment, isfinanced as follows:
Bonds payable, 6% (issued at face amount) 4,000,000
Preferred $2 stock (nonparticipating), $25par 4,000,000
Common stock, $20par 4,000,000
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)$1,000,000, (b) $1,800,000, and (c) $3,200,000.
(Text gives partial answer and states, (a)$0.68)
Explanation / Answer
Earnings per share formula Net Income - Preferred dividends No. of common shares outstanding No. of Preferred stock = 4,000,000 25 = 160,000 shares Dividend for 160,000 shares = 160,000 * 2 ( given) = 320,000 Interest on the bonds 4,000,000 * 6% = 240,000 No. of common stock = 4,000,000 20 = 200,000 A. Earnings per share assumingincome before bond interest and income tax is1,000,000 Income 1,000,000 - bondinterest 240,000 Income before tax 760,000 - Income tax 40 % 304,000 Netincome 456,000 EPS = 456,000 - 320,000 200,000 = 0.68 B.Earnings per share assuming income before interest andtax is 1,800,000 Income 1,800,000 - interest 240,000 1,560,000 -tax 624,000 Net income 936,000 EPS = 936,000 - 320,000 200,000 = $ 3.08 C. Earnings per share assuming income before interest and tax is3,200,000 Income 3,200,000 - bondinterest 240,000 2,960,000 - incometax 1,184,000 Netincome 1,776,000 EPS = 1,776,000 - 320,000 200,000 = $ 7.28
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