Question

Calculating EPS and Multiple Securities

At the end of 2020, the records of Wolverine Corporation reflected the following.

Common stock, $10 par; authorized 100,000 shares: issued and outstanding throughout the year,
50,000 shares			$500,000
Preferred stock, $50 par, 7%, cumulative, convertible into common stock, share for share;
authorized, 10,000 shares; issued and outstanding throughout year, 2,000 shares			100,000
Contributed capital in excess of par, common stock			80,000
Retained earnings (no dividends declared during the year)			470,000
Bonds payable, 10% nonconvertible, issued at par in 2016			150,000
Net income			120,000
Stock options outstanding (all year for 10,000 shares of common stock at $15 per share)
Income tax rate, 25%
Average market price of the common stock during 2020, $25 per share

Required

a. Is this a simple or a complex capital structure?

AnswerSimple structureComplex structure

b. Compute the required EPS amounts.

• Note: Round earnings per share amounts to two decimal places.
• Note: If an amount is not required, leave the answer blank (zero).

	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

Answer for point a

The data provided in the question is an example of complex capital structure since it has the below characteristics:

- It has common share stocks

- preferred share stocks, and

- Stock options

EPS calculation

Basic EPS

It has to be calculated ONLY based on the number of shares issued during the period.

Please refer to the below formula for calculating Basic EPS

Basic EPS = (Net income - preferred dividends) ÷ weighted average of common shares outstanding during the period

Net income		120,000
Income tax expense (25% of 120,000)		30,000
Net income after tax		90,000
Payment to Preferred stockholders
Issued 2000 stock @ 50	100,000
Dividend @ 7%		7,000

Based on the above working, Basic EPS is

= (90,000 - 7,000) / 50,000* = 1.66 Per share

*50,000 is issued share throughout the year as per the data provided in the question.

Diluted EPS

For calculating Diluted EPS, we have to include Stock options outstanding of 10,000 shares along with share issued of 50,000 as the Wolverine Corporation is committed to issuing additional capital stock shares in the future for stock options that the company has granted to its stockholders.

Diluted EPS = (90,000 - 7,000) / (50,000 + 10,000)  = 1.38 Per share