Question

In: Accounting

Data for the Dusty Co. at the end of 2020 is listed below. All bonds and...

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!

Solutions

Expert Solution

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

Note ; For Any clarifications please make A comment


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