Question

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Net income $500 million, common stock $1 par. 1/1 shares outstanding 150 million shares, 2/1 retire...

Net income $500 million,

common stock $1 par.

1/1 shares outstanding 150 million shares,

2/1 retire for cash 24 million shares,

7/23 2-for-1 split. 9/1 sold for cash 18million shares

Preferred stock, 10% $60 par, cumulative, non-convertible $70 million.

Preferred stock, 8% $50 par, cumulative, convertible into 4 million shares common stock $100 million.

Incentive stock option outstanding, fully vested for 4 million shares of common stock, exercisable at $15 per share.

Bond payable, 12.5% convertible into 20 million shares of common stock $200 million.

The average market price of common stock was $20

The convertible preferred stock and the bonds payable had been issued at par in 2012

The tax rate was 40%

Require: calculate basic and diluted earnings per share for the year ended December 31, 2014

Expert Solution

Basic EPS:

Weighted Avg Shares:

150 million shares *2*12/12 = 300 million shares

-24 million shares *2*11/12 = (44) million shares

18 million shares * 4/12 = 6 million shares( issued after split, so no adjustments required)

262 million shares

Earning Per Share (EPS) =

[$500 mil (Net Income) - $7 mil (Preferece share Dividend) - $8 million (Preference Share Dividend )]/262 million shares = $485 million / 262 million shares = $1.85 /share (Basic EPS)

Diluted EPS:

Incentive Stock Option:

400 million shares * $15 = $ 60 million

$60 million/ $20 (Average Price) = 3 million shares

4 million shares issued - 3 million shares repurchased = 1 million shares diluting EPS

New EPS after issue of convertible incentive stock options = $485 million / (262 million + 1 million) = $485 million/263 million = $1.84/share

Now impact of Convertible securities on EPS:

Impact of Preference Shares = $8 million(100*8%)/ 4million shares = $2 per share

Impact of bonds = {($200 million * 12.5%) (1-t(40%))}/(20 million *2 split) = $25 million (1-0.40)}/40 million = $0.38/ share

Diluted EPS = ($485 million + $15 million)/(263+40 million) = $1.65/ share

jeff jeffy answered 2 years ago

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