Ask Question
24 March, 08:58

Two companies are financed as follows: X Co. Y Co. Bonds payable, 9% issued at face $5,000,000 $3,000,000 Common stock, $25 par 3,000,000 3,000,000 Income tax is estimated at 40% of income for both companies. Determine for each company the earnings per share of common stock, assuming that the income before bond interest and income taxes is $2,280,000 each. Round your answers to two decimal places. Earnings per Share on Common Stock X Co. $ Y Co. $

+2
Answers (1)
  1. 24 March, 09:26
    0
    The Earnings per Share on Common Stock X Co. $ Y Co is $9.15 and $10.05 respectively.

    Explanation:

    To compute the earning per share, first we have to calculate the net income and number of outstanding shares.

    In mathematically,

    Earning per share = Net income : Number of outstanding shares

    where,

    Net income = Income before bond interest and income taxes - interest - tax

    where,

    Interest = Bonds * Rate

    Tax = income tax rate * remaining balance

    whereas, number of outstanding shares = Common stock : price of shares

    So,

    For X,

    The net income is = $2,280,000 - ($5,000,000 * 9%) - (40% of remaining balance)

    = $2,280,000 - $450,000 - $732,000

    = $1,098,000

    And, Number of outstanding shares = 3,000,000 : $25 = 120,000

    So, Earning per share for X is

    = $1,098,000 : 120,000 = $9.15

    For Y,

    The net income is = $2,280,000 - ($3,000,000 * 9%) - (40% of remaining balance)

    = $2,280,000 - $270,000 - $804,000

    = $1,206,000

    And, Number of outstanding shares = 3,000,000 : $25 = 120,000

    So, Earning per share for X is

    = $1,206,000 : 120,000 = $10.05

    Hence, the Earnings per Share on Common Stock X Co. $ Y Co is $9.15 and $10.05 respectively.
Know the Answer?
Not Sure About the Answer?
Find an answer to your question 👍 “Two companies are financed as follows: X Co. Y Co. Bonds payable, 9% issued at face $5,000,000 $3,000,000 Common stock, $25 par 3,000,000 ...” in 📗 Business if the answers seem to be not correct or there’s no answer. Try a smart search to find answers to similar questions.
Search for Other Answers