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24 October, 19:10

Domanico Co., which produces and sells biking equipment, is financed as follows: Bonds payable, 10% (issued at face amount) $2,000,000 Preferred $2 stock, $20 par 2,000,000 Common stock, $25 par 2,000,000 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) $700,000, (b) $900,000, and (c) $1,100,000.

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  1. 24 October, 19:23
    0
    a) $1.25 per share

    b) $2.75 per share

    c) $4.25 per share

    Explanation:

    first we must determine bond interest = $2,000,000 x 10% = $200,000

    I assume that there are not 2,000,000 preferred stocks since then the preferred stock dividend would be $4,000,000 per year which is much greater than any income given. Instead I guess that the total outstanding preferred stocks = $2,000,000 / $20 = 100,000 preferred stocks x $2 = $200,000 preferred stock dividends.

    I will also assume that the same thing happened to common stocks = $2,000,000 / $25 = 80,000

    earnings per share = (net income - preferred stock dividends) / outstanding common stocks

    tax = 40%

    a) EBIT = $700,000

    net income = ($700,000 - $200,000 interests) x (1 - 40%) = $300,000

    earnings per share = ($300,000 - $200,000) / 80,000 = $1.25 per share

    b) EBIT = $900,000

    net income = ($900,000 - $200,000 interests) x (1 - 40%) = $420,000

    earnings per share = ($420,000 - $200,000) / 80,000 = $2.75 per share

    c) EBIT = $1,100,000

    net income = ($1,100,000 - $200,000 interests) x (1 - 40%) = $540,000

    earnings per share = ($540,000 - $200,000) / 80,000 = $4.25 per share
  2. 24 October, 19:24
    0
    a. Earnings per share on common stock $ 1.70 i. e., 1 Dollar and 70 cents

    b. Earnings per share on common stock $ 3.20 i. e., 3 Dollars and 20 cents

    c. Earnings per share on common stock $ 4.70 i. e., 4 Dollars and 70 cents

    Calculation of Bond Interest:

    As per the information given in the question we have

    Bonds payable, 10 % (issued at face amount) = $ 2,000,000

    This implies that rate of Bond Interest = 10 %

    Total face value of the Bonds issued = $ 2,000,000

    Thus the Bond Interest = Total face value of the Bonds issued * Rate of Bond Interest

    = $ 2,000,000 * 10 % = $ 200,000

    Thus the Bond Interest = $ 200,000

    Calculation of Preferred stock Dividend:

    As per the information given in the question we have

    Total value Preferred Stock issued = $ 2,000,000

    Par value of preferred stock = $ 20

    Thus the Total No. of shares of preferred stock issued = $ 2,000,000 / $ 20

    = $ 100,000

    As per the information given in the question

    Preferred stock dividend per share = $ 2

    Total No. of shares of preferred stock issued = $ 100,000

    Thus the total preferred stock dividend i. e., Preference Dividend = Preferred stock dividend per share * Total No. of shares of preferred stock issued

    = $ 2 * 100,000

    = $ 200,000

    Thus the Preference Dividend = $ 200,000

    Calculation of Number of shares of Common stock:

    As per the information given in the question we have

    Total value Common Stock issued = $ 2,000,000

    Par value of Common stock = $ 25

    Thus the Total No. of shares of Common stock issued = $ 2,000,000 / $ 25

    = 80,000

    No. of shares of Common stock = 80,000
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