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Domanico Co., which produces and sells biking equipment, is financed as follows: Bonds payable,...

Question:

Domanico Co., which produces and sells biking equipment, is financed as follows: Bonds payable, 8% (issued at face amount) Preferred 5% stock, $10 par Common stock, $20 par 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.

Earnings-Per-Share:

Earnings-per-share(EPS) is the computation of earnings per share of common stockholders. It uses net income available to common stockholders. It presented as basic EPS and Diluted EPS

Answer and Explanation:


Computation of Earnings-per-share in all three situations:


Description EBIT = $10,500,000 EBIT = $11,800,000 EBIT = $13,000,000
Income before interest and tax $10,500,000.00 $11,800,000.00 $13,000,000.00
Less: Bond interest ($20,000,000 * 8%) $1,600,000.00 $1,600,000.00 $1,600,000.00
Income before tax $8,900,000.00 $10,200,000.00 $11,400,000.00
Less: Income tax @ 40% $3,560,000.00 $4,080,000.00 $4,560,000.00
Net income $5,340,000.00 $6,120,000.00 $6,840,000.00
Less: Preference dividend ($20,000,000 @ 5%) $1,000,000.00 $1,000,000.00 $1,000,000.00
Net income available to common stockholders (A) $4,340,000.00 $5,120,000.00 $5,840,000.00
Number of outstanding common stock shares (B) $1,000,000.00 $1,000,000.00 $1,000,000.00
Earnings per share (A) / (B) $4.34 $5.12 $5.84

Note: Capital Structure:

Bonds capital (at face value) = $20,000,000

5% Preferred stock capital = $20,000,000

Common stock = $20,000,000 (at $20 par)


Learn more about this topic:

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How to Calculate Earnings Per Share: Definition & Formula

from Introduction to Business: Homework Help Resource

Chapter 24 / Lesson 14
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