During 2014, XX has net income of $725,000. Throughout the year, the company had 150,000 shares...

During 2014, XX has net income of $725,000. Throughout the year, the company had 150,000 shares of common stock outstanding. Also, the company has 25,000 shares of preferred stock that pay a dividend of $5.00 per share that is convertible into 5 shares of common stock for each share of preferred. The preferred stock is considered to be dilutied. The tax rate for XX is 40%.

a: What is basic earnings per share? Round to the closest cent.

b. What is diluted earnings per share? Round to the closest cent.

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Expert Solution

Answer:

a) Calculation of basis earning per share:

Earning per share = (Earnings available for equity shareholders* / Number of outstanding equity Shares)

= $600,000 / 150,000

= $ 4 per share.

Note:

Earnings available for equity shareholders = Net Income - Preference Dividend

= $725,000 - (25,000 preference share x $5)

= $ 600,000

Assumed net income is after tax.

b) Calculation of diluted earning per share:

Diluted earning per share =(Earnings available for equity shareholders*/ No. of outstanding equity Shares**)

= $725,000/ 275000

= 2.64 per share.

Notes:

Earning available for Equity shareholder's* = (Net Income - Preference Dividend) + Convertible preference dividend)

= ($725,000- $125000) +$125,000

= $725,000

No. of outstanding common stock** = No.of common stock + convertible Preference share

= $150,000 + $ 125,000

= 275,000 Common shares

Assumed net income is after tax.

ekkarill92 answered 1 year ago

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