Question

On January 1, 2012, Raiders Company had 50,000 shares of common stock outstanding and 10,000 shares of 7%, $100 par, cumulative preferred stock outstanding. The preferred stocks are convertible to 50,000 shares of common stocks. Raiders reported net income of $400,000. The income tax rate is 30%. Also outstanding at January 1, 2012 were fully vested incentive stock options giving key employees the option to buy 20,000 common shares at $20. The market price of the common shares averaged $40 during 2012. Raiders also had 3,000, 6% convertible bonds outstanding throughout 2012. Each $1,000 bond is convertible into 50 shares of common stock. None of the bonds had been converted by December 31, 2012 and no stock options were exercised during the year.

Required:

Compute basic and diluted earnings per share for Raiders Company for 2012. You must explain why you include or exclude potentially dilutive securities in your calculation of diluted earnings per share to receive full credit.

Answer 1

	Basic EPS
	Particulars	$
	Net income	$      400,000
Less	Preference share dividend	$         70,000
	Net income for common stockholders	$      330,000
	Common stock outstanding	50000
	Basic EPS	$             6.60

	Diluted EPS
	Particulars	Number
	Common stock outstanding	50,000
Add	Assumed Preferred stock converted to common stock assumed to be converted at the beginning of the year	50,000
Add	Assumed Stock options exercised common stock issued at the beginning of the year	20,000
Less	Assumed Common stock bought back from the proceeds of stock options exercised at the beginning of the year (20000*$20)/$40	-10,000
Add	Assumed convertible bonds converted to common stock assumed to be converted at the beginning of the year	150,000
	Total common stock outstanding for Diluted EPS	260,000
	Particulars	$
	Net income for common stockholders	$       330,000
Add	Dividend to preferred stock as assumed conversion	$         70,000
Add	Interest on convertible bondholders net of tax as assumed conversion ((3000 x $1000 x 6% x (1-30%))	$       126,000
	Total income available for common stockholders	$      526,000
	Total income available for common stockholders	$      526,000
	Total common stock outstanding for Diluted EPS	260000
	Diluted EPS	$             2.02

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