ABC Corporation has the following capitalization: 500,000 shares of common outstanding $ 5,000,000 500,000 shares of 5% preferred $ 5,000,000 10,000 7% debentures $10,000,000 The yearly earnings for the corporation before interest and taxes are $4,000,000. If the corporation is in the 34% tax bracket, what are the earnings per share?
$3.86 Explanation: Using the $4,000,000 in earnings, you must pay the interest on the debentures first, the income taxes second, the dividend on the preferred stock third, and apply any amount left over to the earnings per share for the common stock. Step 1: $10,000,000 x 7% = $700,000 interest on debentures Step 2: $4,000,000 - $700,000 = $3,300,000 in remaining earnings Step 3: $3,300,000 x 34% = $1,122,000 taxes Step 4: $3,300,000 - $1,122,000 = $2,178,000 in remaining earnings Step 5: $5,000,000 x 5% = $250,000 dividend on preferred stock Step 6: $2,178,000 - $250,000 = $1,928,000 in remaining earnings Now that you have determined the earnings available for the common stock, ju
