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On January 1, 2012, Raiders Company had 50,000 shares of common stock outstanding and 10,000 shares...

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.

Solutions

Expert Solution

EPS = Profit attributable to equity share holders / Weighted average number of equity shares

1. Profit attributable to Equity Shareholders = Net Income - Dividend on Preference Shares

= $400000 - 10000*100*7%

= $330000

Basic EPS = Profit attributable to Equity Shareholders / Weighted average number of shares

= $330000/50000

= 6.60 per share

Diluted EPS:

Computation of potential Equity shares:

(a) Equity shares = 50,000

(b) Shares issued to Employees = 20,000

(c) Convertible bonds ( 3000 * 50) = 150,000

Total potential equity shares = 220,000

Profit attributable to equity shares (including savings due to conversion)

Existing Profit attributable to equity shares + Savings on interest on bonds (Incl Tax Savings)

= $330000 + 3000*1000*6%(1-0.3)

= $474000

Diluted EPS = Profit attributable to equity share holders / Weighted average number of potential equity shares

= 474000 / 220,000

= $2.15 per share

ekkarill92 answered 2 years ago
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