Question

The Canyon Company is preparing its annual earnings per share amounts to be disclosed on its 2019 income statement. It has collected the following information at the end of 2019:

• Net income: $125,000. Corporate income tax rate: 30%
• Common stock outstanding on January 1, 2019:   12,000 shares, $10 par
• Common stock issuances during 2019:
  • April 2 - 2,500 shares;
  • October 1 - 4,000 shares.
• Stock split: On November 1, the company declared a two-for-one stock split.
• Common stock prices: The common stock sold at an average market price of $20 per share during the year.
• 8% convertible preferred stock outstanding on December 31, 2019: 3,000 shares. The preferred stock was issued in 2010. Each share of $100 par preferred stock is convertible into 5 shares of common stock. Current dividends have been paid. To date, no preferred stock has been converted.
• Compensatory share options outstanding: Key executives may currently acquire 1,000 shares of common stock at $15 per share. The option were granted in 2010. To date, none have been exercised.
• $200,000 of 8% convertible bonds: Each bond is convertible into 28 shares of common stock.

Required:

Prepare supporting calculation for Canyon Company and compute its:

1. Basic earnings per share.
2. Diluted earnings per share.

Answer 1

Requirement a Calculaion of Earning per share of Canyon Company for the year ending 2019

Numerator (Basic EPS): Net income = $125000; Preferred dividends = $24000(3000*100*8%)

Denominator (Basic EPS): Weighted average shares of common stock outstanding

1/1 – 12/31

12000 x (12/12)

12000

8/31 – 12/31

2500 x (8/12)

1666.66

4000 x(3/12)

1000

Weighted average shares

14666.66

shares

Basic EPS=$125000-$24000/14666.66

$6.8863 or 6.89 approx

Requirement b Calculaion of Diluted Earning per share of Canyon Company for the year ending 2019

Numerator (Diluted EPS): Net income = $125000; Preferred dividends = $24000(3000*100*8%);After tax Interest on 8*% Bond=200000*8%=16000*(1-0.3)=11200

Denominator (Basic EPS): Weighted average shares of common stock outstanding+Diluted Shares

12000 x (10/12)

10000

2500 x (7/12)

1458.33

4000 x(1/12)

333.33

Stock Split on 1st november declared-Two for every one stock

No. of stock outstanding as on1st november =12000+2500+4000=18500

Stock spilt=18500x2=37000shares=37000*2/12=6166.66Shares

6166.66

Total Weighted Average Shares

17958

shares

Diluted Shares

A.No preference shares converted till date .Hence not to be considered in dilution

B.No options exercised.Hence not to be considered.

C.$2lac 8% Covertible Bond .No conversion took place during the period.

Total

Diluted EPS=$125000-$24000+$11200/17958

6.2479or 6.25 aprox