Effect of Financing on Earnings per Share 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. Enter answers in dollars and cents, rounding to two decimal places.

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

Explanation:

1.Calculation of Bond Interest:

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

2.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

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

c.Calculation of Number of shares of Common stock :

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

EARNING PER SHARE ON COMMON STOCK

(A)

Income before interest and income tax $700,000

Less mind interest ($200,000)

Income after bond interest and before income tax $500,000

Less income tax (40%×$500,000) $200,000

Net income tax ($500,000-$200,000) $300,000

Less preferred dividend ($200,000)

Income after preferred dividend $100,000

Numbers of shares of common stock $80,000

Earning per share on common stock ($100,000÷$80,000) $1.25

(B)

Income before interest and income tax $900,000

Less mind interest ($200,000)

Income after bond interest and before income tax $700,000

Less income tax (40%×$700,000) $280,000

Net income tax ($700,000-$280,000) $420,000

Less preferred dividend ($200,000)

Income after preferred dividend $220,000

Numbers of shares of common stock $80,000

Earning per share on common stock ($220,000÷$80,000) $2.75

(C)

Income before interest and income tax $1,100,000

Less mind interest ($200,000)

Income after bond interest and before income tax $900,000

Less income tax (40%×$900,000) $360,000

Net income tax ($900,000-$360,000) $540,000

Less preferred dividend ($200,000)

Income after preferred dividend $340,000

Numbers of shares of common stock $80,000

Earning per share on common stock ($340,000÷$80,000) $4.25

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