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Reported net income of $400,000 in 2020. On January 1,2020 there was 100,000 shares of common...

Reported net income of $400,000 in 2020. On January 1,2020 there was 100,000 shares of common stock outstanding. On Paril 1, 10,000 shares were issued and on septmber 1, Claire bought 15,000 shares of treasury stock . There are 15,000 stock options to buy common stock at an exercise orice of $40 per share. The market orice of common stock is $50 with tax rate if 25%

20,000 shares of converible preferred stock outstanding. $100 par, paid a dicidend of $3.50 per share and each share ks converible into three ajares of common stock

Clarie previously issused $1,000,000 of 8% bonds at face value. Each $1,000 bikd is convetibke into 30 shares of commkn stokc

Compute Claire's Basic and Diluted Earnings
per share for the year ended december 31, 2020

Solutions

Expert Solution

Net income = $400000

Preferred dividend = 20000 * 3.50 = 70000

Earnings available for common share holders’ = 400000 - 70000 = 330000

Weighted average number of common share outstanding (WANCSO) =

Beginning share outstanding = 100000 * 12 / 12 = 100000

Add: On April 01, issue = 10000 * 9 / 12 = 7500

Less: On sep 1, Treasury stock = 15000 * 4 / 12 = (5000)

WANCSO = 100000 + 7500 - 5000 = 102500

Basic EPS = Earnings available for common share holders’ / WANCSO

Basic EPS = 330000 / 102500 = $3.22 per share

Diluted EPS

EPS effect of convertible preferred share = 70000 / (20000 * 3) = 1.166

Dilutive nature

EPS effect of convertible Bond

After tax interest = 1000000 * 8% - 25% = $60000

Converted share = 1000000 / 1000 * 30 = 30000

EPS effect of convertible Bond = 60000 / 30000 = 2

Dilutive nature

Option

Option amount = 15000 * 40 = 600000

Repurchased share using these amount = 600000 / 50 = 12000

So, new issue of share for option = 15000 - 12000 = 3000 share

Ranking based most dilutive to least dilutive.

1 - option

2 - Preferred share

3- Bond

Numerator

Denominator

EPS

Basic EPS

330000

102500

$3.22

Option

0

3000

Sub total

330000

105500

$3.13

Preferred share

70000

60000

Sub total

400000

165500

$2.42

Bond

60000

30000

Sub total

460000

195500

$2.35

Diluted EPS = $2.35 per share

ekkarill92 answered 3 years ago
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