Question

Nichols Corporation began the year 2015 with 40,000 shares of common stock and 10,000 shares of convertible preferred stock outstanding. On May 1, an additional 18,000 shares of common stock were issued. On July 1, the 12,000 shares of common stock were acquired for the treasury. On September 1, the 12,000 treasury shares of common stock were reissued. The preferred stock has a $4 per share dividend rate, and each share may be converted into 2 shares of common stock. Nichols Corporation's 2015 net income is $280,000.

Compute earnings per share for 2015. Round your answer to two decimal places.

Compute diluted earnings per share for 2015. Round your answer to two decimal places.

Answer 1

Dear Student,

In case of Basic EPS, we have to use following formulae

Basic EPS = Profits for common stock holders / No. of common stocks

Net Income	2,80,000
Dividend declated to preferred shareholders (10000 X 4)	40,000
Profit for Common Stockholders	2,40,000
No. of Common Stocks at beginning	40,000
18000 Common stock issued on 1st May i.e. 8 months proportion (18000 x 8/12)	12,000
12000 Common stock aquired for treasury on 1st July i.e 6 months proportion to be reduced (12000 x 6 /12)	-6,000
No. of common stock for Basic EPS	46,000
EPS of common stock	5.22

In case of diluted EPS, we assume that shares, debentures, bonds etc if convertible in future will be assumed has been converted at beinning of current year for which EPS is being calculated. If so then we will not pay dividend to Preferred stock holders. So Diluted EPS will be as follows

Net Income	2,80,000
Dividend for preferred shareholder - No dividend	-
Profit for Common Stocks	2,80,000
No. of Common Stocks at beginning	40,000
18000 Common stock issued on 1st May i.e. for 8 months (18000 x 8/12)	12,000
12000 Common stock aquired for treasury on 1st July (12000 x 6 /12)	-6,000
Conversion of Preffered Stock to Common Stock (10000 x 2)	20,000
No. of common stock for Basic EPS	66,000
Dilued EPS of common stock	4.24

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