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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Effect of financing on earnings per share BSF Co.. which produces and sells skiing equipment. is financed as follows:


Income lax 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) $1,000,000. (b) $3,000,000. and (c) $4,500,000.

To determine

Concept Introduction:

Basic Earnings per share:

The Basic Earnings per share is the amount of net income earned by each common share outstanding. The Earnings per share calculated by with help of following formula:

  Basic Earnings per share=Net Income - Preferred DividendWeighted Average Common Shares Outstanding

   Net Income available to common stockholder = Net income  Preferred Dividend

To Calculate:

The earnings per share for each income level

Explanation

The earnings per share for each income level are as follows:

    a b c
    Income before interest and tax (A) $ 1,000,000 $ 3,000,000 $ 4,500,000
    Interest on Bonds (B) (7500000*8%) $ 600,000 $ 600,000 $ 600,000
    Income before tax (C) = (A-B) $ 400,000 $ 2,400,000 $ 3,900,000

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