Question

The following information is available relating to the capital structure of Superior Dairy Inc.(fiscal year end December 31) as of December 31, 2018:

Bonds payable, due 2029, 4%, $1000 face value, $60 million -each bond is convertible into 14 common shares

Commn shares-60 million issued and outstanding $330 million

Preferred shares, 5% dividend, cumulative, $100 par value $500 million -each preferred share is convertible into 3 common shares

Other information is as follows:

-The income tax rate is 40%;

-On March 1, 2019, Superior purchased and retired 4 million common shares.

-On September 13, 2018 call options were issued and are exercisable for 5 million common shares at a price of $56 per share. During 2019 common shares averaged $70 per share, and peaked on December 31, 2019 at $80. All were outstanding as of year-end.

-On July 1, 2019, put options were granted as compensation to executives. These put options are exercisable for 3.2 million common shares with an exercise price of $80. All were outstanding as of year-end.

-On October 1, 2019, $20 million of the convertible bonds were converted into common shares, and interest on them was paid up to that date.

-Net income for 2019 was $150 million from continuing operations, and a loss of $25 million from discontinued operations.

Required :

Compute Superior`s basic and diluted EPS for the year ended December 31, 2019.

Show in detail all computations needed for support, by presenting results in a well formatted schedule.

Answer 1

EPS = Income available to common stock holders / Weighted Average number of common shares ourstanding.

For Basic EPS

Net Income available to common stock holders = $150 million - $25 million - (5% of 500 million) = $100 million

Weighted Average Number of common shares outstanding = 60 million - 4 million *10/12 + 20 million /1000 * 14 * 3/12

= 60 million - 3.33 million + 0.07 million

= 56.74 million shares

Basic EPS = 100 million / 56.74 million shares = 1.7624

For Diluted EPS

Net Income available to common stock holders = $100 million + (5% of 500million) + (4% of 40 million )(1-0.40) + (4% of 20 million )(1-0.40)*9/12

= 126.32 million

Weighted Average Number of common shares outstanding = 56.74 million + 40 million /1000 * 14 + 500 million /100 *3 + 5 million - (5 million * 56 / 70) - 3.2 million + (3.2 million * 80 /70) = 73.76 million shares

Diluted EPS = 126.32 million / 73.76 million shares = 1.7127