Question

Effect of Financing on Earnings per Share

Miller Co., which produces and sells skiing equipment, is financed as follows: Bonds payable, 10% (issued at face amount) $600,000 Preferred $1 stock, $10 par 600,000 Common stock, $25 par 600,000 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) $198,000, (b) $258,000, and (c) $318,000.

Enter answers in dollars and cents, rounding to the nearest cent.

a. Earnings per share on common stock $

b. Earnings per share on common stock $

c. Earnings per share on common stock $

Answer 1

Computation of Earning per Share
Particulars			a	b	c
Earning before interest & tax (EBIT)			198000	258000	318000
Less: interest (600000*10%)			-60000	-60000	-60000
Earning before tax (1)			138000	198000	258000
less: Tax @ 40% of (1)			55200	79200	103200
Net Income after interest & tax			82800	118800	154800
less: dividend (600000/10)			60000	60000	60000
Earning available for equity shareholder (b)			22800	58800	94800
No of shares			24000	24000	24000
Earning per share (a)/(b)			0.95	2.45	3.95
No of share = 600000/25= 24000 shares
Earning per share = earning available for equity share holder/no of shares

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