Question

EPS Question

Turner Corp had 700,000 Net Income 2017. The tax rate is (40%). 330,000 shares of common stock were outstanding were outstanding throughout the year.

Turner Co. Had to following potentially Dialutive securites

-40,000 options to buy common stock at $50 a share outstanding, The market price of the common stock avg $60 during the year.

-During the year, there were 20,000 share of cumultive convertible preferred stock outstanding, The preferred stock is $200 par and each share is convertible into 3 shares of common stock

-Turner issued $3,000,000 of 8% convertible bonds at face value during the year. Each $1,000 bond is convertible into 20 share of Common stock

Using the information, compute the EPS for 2017 that will be provided on the financial statment. Show all calculations & work

Answer 1

Reported under financial statement
Basic earnings per share	$ 1.9394
Diluted Earnings per share	$ 1.7647

Net income after tax	700,000
Less: dividend to preferred stock (20000*3 per share considered)	60,000
Net income available for common stock holders	640,000
Net income available for common stock holders	640,000
Divided by: weighted average share in common stock	330,000
Basic earnings per share	$        1.9394

Stock options
Market value of option exercisable (60*40000)	2,400,000
Less: exercisable value of option (50*40000)	2,000,000
Value of option	400,000
Number of share adjusted (400000/60) (Rounded)	6,667
Convertible bond
Interest paid to bond (3000000*8%)	240,000
Less: tax on interest (240000*40%)	96,000
Adjustment in income for convertible bond	144,000
Conversion ratio	20
Multiply by: Number of bond (3000000/1000)	3,000
Number of share adjusted	60,000
Convertible preferred stock
Adjustment in income for convertible preferred stock = preferred divided	60,000
Conversion ratio	3
Multiply by: Number of preferred stock	20,000
Number of share adjusted	60,000

	Increase in earning	Increase in number of common shares	Earning per incremental share (Increase in earning / increase in number of common shares)
Options	0	6667	0.00
Convertible bond	144000	60000	2.40
Preferred stock	60000	60000	1.00
The order in which to include dilutive instruments (lowest earning per incremental share considered first.)
1	Options
2	Convertible preferred stock
3	Convertible bond

Dilutive Earning per share
	Adjusted Net income	Potential common share	Per share (Adjusted Net income / potential common share)	Nature
As per Basic Earnings per share	640000	330000	1.9394
Add: options	0	6667		Dilutive
	640000	336667	1.9010
Add: Convertible preferred stock	60000	60000		Dilutive
	700000	396667	1.7647
Add: Convertible bond	144000	60000		Anti-Dilutive
	844000	456667	1.8482 (Should not considered For Diluted EPS)
Diluted EPS after Convertible preferred stock			1.7647
Earning per incremental share for Convertible bond			2.4000
Earning per incremental share for Convertible bond is higher than Diluted EPS after Convertible preferred stock. It is anti-dilutive instrument. Not considered for calculation of Diluted Earnings per share. It means Diluted Earnings per share = 1.7647