Question

Data for the Dusty Co. at the end of 2020 is listed below. All bonds and preferred stock were issued at par.

1. $500,000 10 year 6% convertible bond issued on 1/1/13 with conversion terms of 80 shares of common for each $1,000 bond.

2. $1,000,000 20 year 7% convertible bond issued on 1/1/14 with conversion terms of 40 shares of common for each $1,000 bonds.

3. $1,000,000 (10,000 shares) 7% preferred stock $100 par issued on 1/1/15 with conversion terms of 10 shares of common for each share of preferred.

4. $800,000 25 year 9.5% convertible bond issued 6/30/20 with conversion terms of 100 shares of common stock for each $1,000 bond.

5. Common stock outstanding on 12/31/20 600,000 shares

6. Net income for 2020 $1,525,000

7. Income tax rate 40% Required: Compute the basic and diluted EPS for 2020 assuming no additional shares of common stock were issued during the year.

PLEASE SHOW ALL WORK!

Answer 1

Basic EPS=

(Net income – preference dividend ) / Average outstanding shares

Net income = 1525000

Common Shares outstanding = 600000

Basic Eps =     1525000/ 600000

                  =    2.54166666

= $ 2.54 per Share

    DIVIDEND on non cumulative preference shares are not considerd because they are not declared by the company ( non – cumulative )

If preference shares are cumulative

Basic EPS=

(Net income – preference dividend ) / Average outstanding shares

Net income = 1525000

Common Shares outstanding = 600000

Preference dividend = 1000000 * 7%

= $ 70000

Basic Eps =     (1525000-70000)/ 600000

                  =    2.425

= $ 2.42 per Share

Preference dividend   = 1000000*7% = 70000

Interest on Bonds

1) 500000 * 6% = 30000

2) 1000000 * 7 % = 70000

3) 800000 * 9.5 % = 76000

Total interest on bonds = 30000 + 70000 + 76000

= $ 176000

Diluted EPS=       

Net income after giving effect to diluted share / (Average outstanding shares + Diluted shares)​

Net income after giving effect to diluted shares

   =net income+ interest on bonds payable – (40% on interest on bonds payable)+ preference dividend payable on convertiable shares

       = 1525000 + 176000 – ( 40 % of 176000 ) + 70000

                       = 1771000 - 70400

                          = 1700600

Diluted shares = no of bonds converted into Shares + preference shares converted

   No of Shares converted from bonds     =

    (500000/1000 ) *80 + (1000000/1000)*40 + (800000/1000)*100

= 160000 Shares

Preference shares converted into equity

= ( 1000000 / 100 ) * 10

= 100000 Shares

              

Outstanding shares = 600000 Shares

Total no of shares for calculating diluted eps

= common shares + Diluted Shares

= 600000+160000 + 100000

= 860000 Shares

Diluted eps =   1700600 / 860000

                       = 1.97744186

                      = $ 1.98 per Share

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