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EPS Question Turner Corp had 700,000 Net Income 2017. The tax rate is (40%). 330,000 shares...

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

Solutions

Expert Solution

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

ekkarill92 answered 2 years ago
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