Question

At December 31, 2021 and 2020, Cow Co. had 105,000 shares of common stock and 5,500 shares of 3%, $100 par value cumulative preferred stock outstanding. No dividends were declared on either the preferred or common stock in 2021 or 2020. Net income for 2021 was $550,000. For 2021, basic earnings per share was:a. $1.65 b. $4.92 c. $5.08d. $9.55

Answer 1

Option B. $4.92

Step-by-step explanation:

The interest on the preferred stock due on the company can be calculated as under:

Interest Payable on 2021 = Preferred: 3% * $100 par value × 2 years × 5,500

Interest Payable on 2021 = $33,000

The earnings can be calculated as under:

Earnings after interest and tax = Net Income after tax - Interest

Here

Total Income = $550,000

Interest = $33,000

By putting the values, we have:

Earnings after interest and tax = $550,000 - $33,000 = $517,000

Earnings per share can be calculated using the following formula:

Earnings per share = Earning after interest & tax / Number of shares

Earnings per share = $517,000 / 105,000 = $4.92