Effect of Financing on Earnings per Share Domanico Co., which produces and sells

Question

Effect of Financing on Earnings per Share Domanico Co., which produces and sells biking equipment, is financed as follows: Bonds payable, 8% (issued at face amount) $10,000,000 Preferred $5 stock, $10 par 10,000,000 Common stock, $20 par 10,000,000 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) $10,500,000, (b) $11,800,000, and (c) $13,000,000. Enter answers in dollars and cents, rounding to the nearest whole cent. a. Earnings per share on common stock $ b. Earnings per share on common stock $ c. Earnings per share on common stock $

Explanation / Answer

SOLUTION

(A)

(B)

(C)

Amount ($) Earnings before bond interest and income tax 10,500,000 Less: Bond interest (10,000,000 * 8%) 800,000 Balance 9,700,000 Less: Income tax (40%) 3,880,000 Net income 5,820,000 Less: Dividends on preferred stock (10,000,000 / $10 * $5) 5,000,000 Earnings available for common stock (A) 820,000 Shares of common stock outstanding (10,000,000 / 20) (B) 500,000 Earnings per share on common stock 1.64

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