In: Accounting
Harvery Inc. has 2,000,000 of shares of $1 par value come stock outstanding January 1st
On July 1st Harvey repurchased 300,000 shares at a cost of $22 per share
December 31, 2015, 300,000 shares were issuable upon exercise of executive stock options- exercise price of $20 per share
Average market price of company's stock $30 per share.
Harvey Inc has two convertible securities
a) Convertible bonds, $2,000,000 Face Value, 7% interest, convertible into 40,000 shares of common stock
b) 50,000 shares of $100 par value convertible preferred stock with dividend rate of 6%. Each $100 par value share convertible into 10 shares each.
During 2015, Harvey's net income was $6,400,000. All preferred stocks/dividends were decrlared and paid. Company's tax rate is 40%.
INSTRUCTIONS: Complete the diluted earnings per share for 2015
Solution:
Weighted average shares for 2015 = (2000000*6/12) + (1700000*6/12) = 1850000 shares
Earning available for equity shareholders for 2015 = Net Income - Dividend to Preferred stock
= $6,400,000 - ($5,000,000 * 6%) = $6,100,000
Basic EPS = Earning for equity shareholders / Weighted average outstanding shares = $6,100,000 / 1850000 = $3.297
Computation of Diluted EPS:
Amount to be paid for stock option = 300000*20 = $6,000,000
Value of option in current shares = Amount paid to exercise option / Current market price = $6,000,000 / 30 = 200000 shares
Diluted shares = Option issued - Value of option in current shares= 300000 - 200000 = 100000
Nos of shares to issued for convertible bonds = 40000 shares
Nos of shares to be issued for preferred stock = 50000*10 = 500000 shares
Total weighted average outstanding shares in future = 1850000 + 100000 + 40000+500000 = 2490000 shares
In future Net income available for equity shareholder will be increase by Interest payment to bond holders net of tax and preferred dividend.
Interest on bond after tax = $2,000,000 * 7% (1-0.40) = $84,000
Preferred dividend = $300,000
Future available earnings for equity shareholders = $6,100,000 + $84,000 + $300,000 = $6,484,000
Diluted EPS = $6,484,000 / 2490000 = $2.604 per share