Rhett Co., which produces and sells biking equipment, is financed as follows:

Rhett Co., which produces and sells biking equipment, is financed as follows:


Bonds payable, 7.5% (issued at face amount) $30,000,000
Preferred $3 stock, $20 par 30,000,000
Common stock, $20 par 30,000,000



Income tax is estimated at 40% of income.

Determine the earnings per share of common stock, assuming that the income before bond interest and income tax is (a) $15,000,000, (b) $17,500,000, and (c) $20,000,000.


Answer:

Rhett
Co.
a. Earnings before bond interest and income tax………………………………… $15,000,000
Bond interest………………………………………………………………………… 2,250,000
Balance……………………………………………………………………………… $12,750,000
Income tax…………………………………………………………………………… 5,100,000
Net income…………………………………………………………………………… $ 7,650,000
Dividends on preferred stock…………………………………………………… 4,500,000
Earnings available for common stock………………………………………… $ 3,150,000
Shares of common stock outstanding…………………………………………… ÷ 1,500,000
Earnings per share on common stock…………………………………………… $ 2.10*
b. Earnings before bond interest and income tax……………………………… $17,500,000
Bond interest………………………………………………………………………… 2,250,000
Balance………………………………………………………………………………… $15,250,000
Income tax…………………………………………………………………………… 6,100,000
Net income…………………………………………………………………………… $ 9,150,000
Dividends on preferred stock……………………………………………………… 4,500,000
Earnings available for common stock…………………………………………… $ 4,650,000
Shares of common stock outstanding………………………………………… ÷ 1,500,000
Earnings per share on common stock………………………………………… $ 3.10**
c. Earnings before bond interest and income tax……………………………… $20,000,000
Bond interest………………………………………………………………………… 2,250,000
Balance………………………………………………………………………………… $17,750,000
Income tax…………………………………………………………………………… 7,100,000
Net income…………………………………………………………………………… $10,650,000
Dividends on preferred stock……………………………………………………… 4,500,000
Earnings available for common stock…………………………………………… $ 6,150,000
Shares of common stock outstanding………………………………………… ÷ 1,500,000
Earnings per share on common stock………………………………………… $ 4.10***