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Primus, Inc., owns all outstanding stock of Sonston, Inc. For the current year, Primus reports net...

Primus, Inc., owns all outstanding stock of Sonston, Inc. For the current year, Primus reports net income (exclusive of any investment income) of $632,000. Primus has 100,000 shares of common stock outstanding. Sonston reports net income of $232,000 for the period with 50,000 shares of common stock outstanding. Sonston also has 10,000 stock warrants outstanding that allow the holder to acquire shares at $13.50 per share. The value of this stock was $27 per share throughout the year. Primus owns 4,900 of these warrants.

What amount should Primus report for diluted earnings per share?

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Expert Solution

PRIMUS INC OWNS ALL OUTSTANDING STOCK OF SONSTON INC

PRIMUS NET INCOME -$632,000

PRIMUS HAS COMMON STOCK OUTSTANDING - 100,000 SHARES

SONSTON

NET INCOME-$232000

COMMON STOCK OUTSTANDING - 50000 SHARES

CALCULATION OF DILUTED EARNING PER SHARE

PARTICULAR AMOUNT
NET INOME P $632,000
ADD- INCOME FROM S 216,966.4
EARNING PER SHARE (A) 848,966.4
OUTSTANDING COMMON SHARES(B) 100,000
DILUTED EPS (A/B)(848,966.4 /100,000) $8.48

THEREFORE P'S REPORT FOR DILUTED EPS IS $8.48

WORKING NOTES -

CALCULATION NUMBER OF SHARES FOR CONVERSION -

TOTAL SAHRE FOR WARRANTS = STOCK WARRANTS OUSTANDING * ACQUIRED SHARES PRICE / FAIR VALUE OF SHARES

=10,000*13.50/20 =6750 SHARES

CALCULATION PERCENTAGE OF WARRANT OWNED BY P

P PERCENTAGE OF WARRANTS = NUMBER OF WARRANTS OF P / TOTAL NUMBER OF WARRANT

=4,900/10000 =49%

CALCULATE TOTAL SHARES HOLD BY S AFTER CONVERSION

PARTICULAR SHARES
SHARES OUSTANDING 50000
ADD-ASSURED CONVERSION OF STOCK WARRANTS 10000
LESS REPURCHASED TRESURY STOCK (10,000-6750) (3250)
TOTAL NUMBER OF SHARES FOR DILUTED EARNING 56750

CALCULATE SHARES HOLD BY P AFTER CONVERSION

SHARES OUTSTANDING + P SHARES FOR WARRANT = 50,000 +(6750 *49%) =53,307.5

CALCULATE PERCENTAGE P'S OWNERSHIP IN S AS SHOWN BELOW

PERCENTAGE OF P'S HOLDING IN S= TOTAL SHARES HELD NY P / TOTAL SHARES OUTSTANDING OF S

=53075/56750 =93.52%

CALCULATE AMOUNT OF P'S OWNERSHIP SHARES IN S NET INCOME

=P'S SHARE FROM S NET INCOME = S NET INCOME * PERCENTAGE OF P'S HOLDING IN S

=232000*93.52% =216,966.4

ekkarill92 answered 2 years ago
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