Answer:
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
