Answer:
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.
