Question

Question 3

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

Common 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 :

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

Answer 1

Superior Dairy Inc
Computation of Basic EPS
Particulars		Amount			Calculation of Profit attributable
					Profit including Discountinuing operation	125
No. of outstanding Shares					Less:5% Preferance dividend	25
At the beggning	10,00,00,000					100
After purchase and retired	49,66,66,667
Bonds Converted into Shares	2,80,000
	59,69,46,667
Basic Earning Per Share
Profit Attributable/no.of outstanding share	2
Computation of Diluted Earning per Share
Dilutive test				Ranking
Bond
Increase in Earning after tax	16,00,000	6,40,000	9,60,000
Increase in no. of Share			56,00,000
Effect			0.17	2
Preferred share
Increase in Earning after tax	25,00,00,000
Increase in no. of Share	15,00,00,000
Effect			1.67	3
Call option
Issue price	56
Avg market price	70
Increase in Earning after tax	-
Increase in no. of Share	1,45,83,333		-	1
Effect
Put Option
Issue price	80
Avg market price	70		1	Antidilutive
Rank wise		1	2	3
Computation of DEPS		Increase in earning /increase in share	Increase in earning /increase in share	Increase in earning /increase in share	Increase in earning /increase in share
Earning for ordinary share	1,00,00,00,000	1,00,00,00,000	1,00,09,60,000	1,25,09,60,000
Outstanding potential share	59,69,46,667	61,15,30,000	61,71,30,000	76,71,30,000
DEPS	1.68	1.64	1.62	1.63
				Antidilutive
SO DEPS is 1.62