Question

You are an Investor who focuses on IT companies with large future potential in further automation of Global Supply Chain. Last year you bought 5,000 shares in Lama Inc. a company well established in the tech domain. The following data are presented by Lama for calendar 2019

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 2019, a $500,000 dividend was declared and paid; however, no dividends were declared in 2016.

3.    The average market price of the common shares in 2017 was $30. The stock price was $27 on January 1, 2017, and $35 on December 31, 2017.

4.    The convertible bonds were sold at par – no discount or premium .

5.    The income tax rate for 2017 is 30%.

Instructions

a)    Calculate basic EPS. – 3 Marks

b)    Calculate diluted EPS. - 9 Marks

c)    What is the importance of reporting diluted EPS? – 3 Marks

Answer 1