Question

A20-14 Basic and Diluted EPS

The following information relates to Willowdale Ltd.’s financial statements for the year ended 31 December 20X6:

a. On 1 January 20X6, Willowdale’s capital structure consisted of the following:

•	450,000 common shares, issued for $5.75 million, were outstanding.
•	50,000 preferred shares bearing cumulative dividend rights of $5 per year.
•	$1 million (par value) of 5% convertible bonds ($1,000 face value), with interest payable on 30 June and 31 December of each year. Each $1,000 bond is convertible into 65 common shares, at the option of the holder, at any time before 31 December 20X1. Interest expensed on the convertible bonds was $80,000.
•	Outstanding options for 50,000 common shares at a price of $5 per share. The average market value of common shares during the period was $20.

b. On 30 September 20X6, Willowdale issued an additional 100,000 common shares for $1.5 million cash.
c. Willowdale reported earnings of $1.5 million for the year ended 31 December 20X6 net of tax of 25%.

Required:
Calculate the basic and diluted earnings per share figures for 20X6

Answer 1

Ques 1 BASIC EPS
	No.	time	w.avg
Beginning balance	450000	12/12	450000
additional	100000	3/12	25000
total w. avg shares			475000
Net income	$        1,500,000
less:preference dividend	$         (250,000)
(50000*5)
net income attributable to common stockholders	$        1,250,000
Basic EPS =1250000/475000=	$                   2.63
Ques 2
so we have dilutive EPS of	$                   2.27
first we see the indivifual effect
options:
potential shares issued	50000
shares retired (50000*5)/20	12500
	37500
Bond
interest avoided
(80000)*(1-0.25)	60000
shares issued	65000
now we caluclate diluted EPS
Basic EPS	1250000	475000	$       2.63
Options:		50000
		-12500
Effect (1)	1250000	512500	$       2.44
Bond
interest avoided	60000
share issued		65000
Effect (2)	1310000	577500	$       2.27