Question

Questions #2 Basic and diluted earnings per share

The following data are presented by Quentin Corp. for calendar 2020

Net income                                                                                                                                                                               $ 4,500,000

Common shares outstanding, 1,000,000 shares

10%, cumulative preferred shares, convertible into 120,000 common shares                             $ 1,600,000

8% convertible bonds; convertible into 105,000 common shares                                                        $ 7,500,000

360,000 call options exercisable at $ 25 per share

Additional information

1.       The common and preferred shares and the convertible bonds were outstanding from the beginning of the year.

2.       In 2020, a $ 500,000 dividend was declared and distributed; however, no dividends were declared in 2019.

3.       The average market price of the common shares in 2020 was $ 30. The stock price was $ 27 on January 1, 2020, and $ 35 on December 31, 2020.

4.       The convertible bonds were sold at par.

5.       The income tax rate for 2020 is 30%.

Instructions

a)      Calculate basic EPS.

b)      Calculate diluted EPS.

c)      Briefly discuss the usefulness of the EPS measure in general. What is the additional importance of reporting diluted EPS?

Answer 1

particulars	amount
net income	45,00,000.00
tax rate	0.30
	13,50,000.00
net income	31,50,000.00
common share outstahding	10,00,000.00
basic eps	3.15
convertible prefrenec shares	1,20,000.00	now converted into equiyt shares
converti ble bonnds	1,05,000.00	now converted into equiyt shares
calls options	3,60,000.00
total revised no of shares
outsanding	15,85,000.00
diluted eps	1.987381703
NOTE : It is assumed that convertible preference shares, bonds and call optons were converted into eqyity shares on begiingn of year
no dividend had been declared to prefernce shaerdholders
500,000 dividend declared has not been dedcuted from net income ie net income is inclusve of equity dividened declared 3) it is tool to measeure managnement performance iie how mucch money ithe comanny is majking for sharehodlers ie it not only conisders only net profit but aslos consider changes in structure of equity share capital it lays days the earning the shareholder would get in the wors sceanrios