Question

Computing EPS with Multiple Potentially Dilutive Securities

Spencer Inc.'s 2020 earnings of $500,000 reflect a tax rate of 25%. During the year, Spencer had the following securities outstanding:

120,000 shares of common stock.

5,000 shares of 6%, $100 par, nonconvertible, cumulative preferred stock.

5,000 shares of 6%, $100 par, cumulative preferred stock, each convertible into 1.75 shares of common stock.

500 bonds, $1,000 face value, 8% interest, each convertible into 30 shares of common stock (issued at face value).

200 bonds, $1,000 face value, 6% interest, each convertible into 20 shares of common stock (issued at face value).

Required

a. Compute basic EPS.

b. Compute diluted EPS.

Note: Round earnings per share amounts to two decimal places.

	Net Income Available to Common Stockholders	Weighted Avg. Common Shares Outstanding	Per Share
Basic EPS	Answer	Answer	Answer
Diluted EPS	Answer	Answer	Answer

Answer 1

(a) basic eps = earning to shareholder after tax and preference dividend / total number of shares .

particulars	amount
earning before tax and interest	5,00,000
less interest on bonds	52,000
earning before tax	4,48,000
less tax @ 25%	1,12,000
Earning after tax	3,36,000
Less Preference dividend	60,000
Earning to shareholder	2,76,000
no of shares	1,20,000
Basic EPS	276000/120000
	= 2.30 $

(b) Diluted Eps= Earning tp shareholder / Total common stock + convertible securities

Convertilble Preference= 5000*1.75= 8750 common stock

convertible 8% bonds =500*30=15000 common stock

convertible 6% bonds=200*20= 4000 common stock

Total common stock = 1,20,000+8750+15000+4000= 1,47,750..

Diluted EPS= 276000/147750 = 1.868 $

See the images for further explanantion