Question

The information below pertains to Monty Company for 2021.

Net income for the year		$1,210,000
7% convertible bonds issued at par ($1,000 per bond); each bond is convertible into     30 shares of common stock		1,970,000
6% convertible, cumulative preferred stock, $100 par value; each share is convertible      into 3 shares of common stock		4,200,000
Common stock, $10 par value		5,820,000
Tax rate for 2021		20%
Average market price of common stock		$25 per share

There were no changes during 2021 in the number of common shares, preferred shares, or convertible bonds outstanding. There is no treasury stock. The company also has common stock options (granted in a prior year) to purchase 71,800 shares of common stock at $20 per share.

(a) Compute basic earnings per share for 2021. (Round answer to 2 decimal places, e.g. $2.55.)

Basic earnings per share

$

(b) Compute diluted earnings per share for 2021. (Round answer to 2 decimal places, e.g. $2.55.)

Diluted earnings per share

$

Answer 1

Q1. According to the Question, First we need to calculate basic earnings per share for 2021:

Basic Earrnings per share=(Net Income- Preference Dividend)/ Common Stock Outstanding

(i) Net Income= $1,210,000

(ii)Preference Dividend= 4,200,000*6%= $252,000

(iii)Common Stock Outstanding=5,820,000/10= 582,000

Basic Earrnings per share= ($1,210,000- $252,000) / 582,000= $1.65

Hence, Basic Earrnings per share for 2021= $1.65.

Q2. Next, we need to calculate diluted earnings per share for 2021:

Diluted Earnings Per Share= (Net Income- Preference Dividend+ Interest savings on Bond net) / (Common Stock Outstanding + Potentially Dilutive Common shares for Bonds + Potentially Dilutive Common shares for Stock Option)

(i)Interest savings on Bond net= $1,970,000*7%*(1-0.2)= 110,320

**Note: 0.2 is a tax rate.

(ii)Potentially Dilutive Common shares for Bonds= $1,970,000/$1,000* 30= 59,100

(iii)Potentially Dilutive Common shares for Stock Option= (Market Price-Option Price)/ Market Price*No. of Options

={($25-$20)/ $25}* 71,800 shares= 14,360

Diluted Earnings Per Share= (1,210,000- 252,000+110,320)/ (582,000+59,100+14,360)

=1,068,320/ 655,460=$1.63

Hence, Diluted Earnings Per Share for 2021 is $1.63.