Question

The following data for Hello Company for 2020 is available:

Transactions in Common Shares                                           

Jan. 1, 2020, Beginning number                                                                                        550,000

Apr. 1, 2020, Purchase of treasury shares                                                                        (50,000)

July 1, 2020, Stock dividend of 50%                                                       

Nov. 1, 2020, Issuance of new shares                                                                               250,000

4% Cumulative Convertible Preferred Stock

10,000 shares, par value is $100, convertible into 150,000 shares of

common stock (already adjusted for the stock dividend).                                             $1,000,000

Stock Options

50,000 exercisable at the option price of $10 per share.

Average market price in 2020 was $25.

(market price and option price already adjusted for the stock dividend).

Net Income                                                                                                                    $2,000,000

Instructions

1. Calculate the preferred stock dividend.

2. Calculate the weighted average shares outstanding during the year.

3. Compute basic earnings per share. (Round to the nearest penny)

4. Compute diluted earnings per share. (Round to the nearest penny)

Answer 1

Step 1:

Net income available for common stockholders per share is called earning per share (EPS). EPS may be calculated in two ways:

Weighted Average Number of Sharesrepresents no. of shares outstanding at the beginning of the year adjusted by the new shares issued, shares bought back, convertible securities like bonds, options, warrants, etc.

STEP 2:

1.Preferred stock dividend=$40,000

2.weighted average shares outstanding during the year=810417

3.Basic earnings per share is $2.42

4.Diluted earnings per share is $2.02

Explanation:

1.

preferred stock dividend=dividend rate*number of preferred stock*par value per share

preferred stock dividend=4%*10,000*$100

preferred stock dividend=$40,000

2.

The starting point is for one to have it at the back of one's hand that the stock dividend is applicable to both transactions before i.e opening balance and purchase of treasury stocks as analyzed:

The adjusted opening balance would be entitled for dividends throughout the year i.e 550,000*(1+50%)*12/12= 825000

The treasury stocks repurchased would not be entitled to dividends for the rest of the year -50000*(1+50%)*9/12= -56250

The new issue of shares would only be entitled to 2-month dividend(November and December) 250,000*2/12= 41667

weighted average number of shares=825000-56250+41667=810417

3.

Basic earnings per share=net income-preferred stock dividend/weighted average number of shares

basic earnings per share=($2,000,000-$40,000)/810417

basic earnings per share=$2.42

4.

Diluted earnings per share=earnings available to common stock+preferred stock dividend/(weighted average number of shares+dilutive shares)

dilutive shares:

convertible preferred stock= 150,000

dilutive options which is computed thus:

total proceeds from options=50,000*$10=$500,000

number of shares paid for=$500,000/$25= 20000

number of shares not paid for(dilutive shares)=50,000-20,000=30000

total dilutive shares=150,000+30,000=180000

diluted earnings per share=($2,000,000-$40,000+$40,000)/(810417+180000)

diluted earnings per share=$2,000,000/990417=$2.02