Question

Information from the financial statements of Henderson-Niles Industries included the following at December 31, 2021:

Common shares outstanding throughout the year		100	million
Convertible preferred shares (convertible into 20 million shares of common)		70	million
Convertible 8% bonds (convertible into 19.0 million shares of common)	$	2,700	million

Henderson-Niles’s net income for the year ended December 31, 2021, is $940 million. The income tax rate is 25%. Henderson-Niles paid dividends of $2 per share on its preferred stock during 2021.

Required:
Compute basic and diluted earnings per share for the year ended December 31, 2021. (Enter your answers in millions (i.e., 10,000,000 should be entered as 10). Round "Earnings per share" answers to 2 decimal places.)

Answer 1

Answer 1

		in Millions
A	Net Income	$ 940.00
B	Preferred Dividend	$ 140.00
C	Outstanding Shares	100.00
(A-B)/C	Basic EPS	$       8.00

Answer 2

Firstly, we calculate Diluted EPS without Bonds:

		in Millions
A	Net Income	$ 940.00
B	Preferred Dividend	$ 140.00
C	Outstanding Shares	100.00
D	Convertible Preference Shares	20.00
(A+B-B)/(C+D)	Diluted EPS	$       7.83

Then, we calculate Diluted EPS with Bonds:

		in Millions
A	Net Income	$ 940.00
B	Preferred Dividend	$ 140.00
C	After-tax interest	$ 162.00
D	Outstanding Shares	100.00
E	Convertible Preference Shares	20.00
F	Convertible bonds	19.00
(A+B-B+C)/(D+E+F)	Diluted EPS	$       7.93

As Diluted EPS increases, it is not a dilution. We can conclude that:

Diluted EPS

$       7.83

In case of any doubt, please comment.