Question

JD Co. is a calendar-year firm with 400 million ordinary shares outstanding throughout 20x4. As part of its executive compensation plan, at January 1, 20x3, the company had issued 40 million executive share options permitting executives to buy 40 million ordinary shares for $10 per share within the next eight years, but not prior to January 1, 20x6. The fair value of the options was estimated on the grant date to be $3 per option.

At January 1, 20x4, convertible bonds were outstanding. The effective interest rate on the bonds was 10% and the carrying amount as at January 1, 20x4 was $100 million. The bonds were converted on April 1 into 14 million ordinary shares.

In addition, JD carries 8 million 4%, $5 par/share nonconvertible preference shares from January 1 to December 31, 20x4. The share options qualify for tax purposes as an incentive plan. The company's net income was $240 million and $300 million in 2014 and 2015, respectively. Its income tax rate is 20%.

Required: Determine basic and diluted earnings per share for JD in 20X4.

Answer 1

EPS = Net Income available for Common Shareholders / Weighetd average number of shares

For Basic EPS

Net Income available for Common Shareholders = $240 million

Weighted Average Number of shares = 400 million + 14 million * 9 /12 = 410.5 million

Basic EPS = $240 million / $410.5 million

= 0.59 per share

For Diluted EPS

Net Income available for Common Shareholders

Paticulars	Amount (millions)
Net Income	$                               240
Add: Interest on bond for 3 months [100 million * 10%* (1-0.20)] * 3 / 12	$                                   2
Income Available for CommonStock holders	$                               242

Weighted Average Number of shares:

Paticulars	Number (millions)
Common shares outstanding	400
Employee Stock Option	40
Convertible Bonds	14
Weighetd Number of Shares	454

Diluted EPS = $242 million / $454 million

= 0.53 per share

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