McLinden Corp. is considering financing $10,000,000 of its upcoming operations b

Question

McLinden Corp. is considering financing $10,000,000 of its upcoming operations by issuing equity and bonds. McLinden is considering issuing $1,000,000 of 10%, $10 par Preferred stock, $4,000,000 of $1 par Common stock, and $5,000,000 of 12% 5 year bonds. Assume that the income before bond interest and income tax is $4,000,000. The tax rate is 40%.

Determine the Earnings per Share calculation for the first year if McLinden finances in this manner. Use the table given below:



Earnings before interest
and income tax $

Deduct interest on bonds _________

Income before income tax $

Less: income tax _________

Net income $

Dividends on
preferred stock _________

Available for dividends
on common stock $

Shares of common
stock outstanding

Explanation / Answer

Earnings before interest and income tax $ 4,000,000 Deduct interest on bonds 600,000 (5,000,000*.12) Income before income tax $ 3,400,000 Less: income tax 1,360,000 (3,400,000*.4) Net income $ 2,040,000 Dividends on preferred stock 100,000 (1,000,000*.1) Available for dividends on common stock $ 1,940,000 Shares of common stock outstanding ÷4,000,000 Earnings per share on common stock $0.485

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