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:

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) $542,500, (b) $697,500, and (c) $852,500.

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

Bonds payable, 10% (issued at face amount) $1,550,000 Preferred $1 stock, $10 par 1,550,000 Common stock, $25 par 1,550,000

Explanation / Answer

Calculate earning per share

a. Earnings per share on common stock $1.25

b. Earnings per share on common stock $2.75

c. Earnings per share on common stock $4.25

a b c Income before interest and tax 542500 697500 852500 Less: Interest (1550000*10%) -155000 -155000 -155000 Income before tax 387500 542500 697500 Less: Tax @40% -155000 -217000 -279000 Net income 232500 325500 418500 Less: Preferred dividend -155000 -155000 -155000 Earning for common Stock 77500 170500 263500 Common Stock (1550000/25) 62000 62000 62000 Earning per share 1.25 2.75 4.25

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