Answer (D) is correct . The company’s net income is $18,000,000 [($35,000,000 EBIT – $5,000,000 interest) × (1.0 – .4 tax rate)]. Thus, the earnings available to common shareholders equal $14,000,000 ($18,000,000 – $4,000,000 preferred dividends), and EPS is $7 ($14,000,000 ÷ 2,000,000 common shares). Given a dividend-payout ratio of 30%, the dividend to common shareholders is expected to be $2.10 per share ($7 × 30%).
Answer (A) is incorrect because The amount of $2.34 results from treating preferred dividends as tax deductible.
Answer (B) is incorrect because The amount of $2.70 ignores the effect of preferred dividends.
Answer (C) is incorrect because The amount of $1.80 is based on a 60% effective tax rate and ignores the effect of preferred dividends.
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The expected common stock dividend per share for Dawson Corporation is
