Question

Part A – Weighted Average Number of Shares Itsy-Bitsy Company’s common stock was trading wildly in 2019, with the company frequently issuing new shares, among other transactions. These were the 2019 common stock transactions: 1. On January 1, there were 240,000 shares outstanding. 2. March 1: The company issued 72,000 new shares. 3. June 1: 84,000 new shares were issued 4. July 1: Because the market price of the stock was rising significantly, the company issued a 2:1 stock split. 5. August 1: The company issued 120,000 new shares 6. October 1: An additional 60,000 shares were issued 7. November 15: The company declared and issued a 15% stock dividend 8. December 1: 132,000 new shares were issued REQUIRED: a. Compute the weighted average number of common shares outstanding for 2019. Show ALL your computations. b. Suppose that in February of 2020, before the financial statements for 2019 were published, the company declared and issued a 50% stock dividend. Explain if this transaction will have an effect on the 2019 average number of common shares. 5 Part B – Basic and Diluted Earnings per Share Computation. Make sure to show ALL your work. A partial income statement for a company for the year 2019 is presented below: Income before interest and taxes $600,000 Interest expense (100,000) Income before income taxes $500,000 Income tax expense (110,000) Net income $390,000 The $100,000 interest relates to convertible bonds, $1,000,000 par, 10% interest. For Basic EPS purposes, the weighted average number of common shares outstanding was 136,000. The company had the following potentially dilutive securities: a. Convertible bonds (described above). Each $1,000 bond is convertible into 25 common shares. The bonds were issued in 2017. Bondholders have the option to convert the bonds starting in 2022. b. Convertible, cumulative preferred stock. These shares were issued on July 1, 2018 and each $100 par share is entitled to a 5% dividend. There are 10,000 shares outstanding and each share is convertible into five shares of common stock. NO dividends were paid in 2018. In July of 2019, the company paid both the 2018 and 2019 preferred dividends. On August 1, 2019, 3,000 preferred shares were converted into 15,000 common shares. c. On July 1, 2019, the company granted options for 40,000 shares of common stock, exercisable in 2021. The exercise price is $20 and the average market price for the second half of 2019 was $25. REQUIRED: Compute Basic and Diluted EPS for the year 2019.

Answer 1