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On January 1, 2017, Wilcorp, Inc. (WINK), had: 200,000 common shares outstanding 10,000 8% preferred shares...

On January 1, 2017, Wilcorp, Inc. (WINK), had:

200,000 common shares outstanding

10,000 8% preferred shares outstanding with a $100 par amount

On March 1, 2017 WINK issued another 25,000 common shares. Also assume that WINK had issued options in 2017 to buy 25,000 shares of common stock at $45 per share and that the market price is $50 per share. Net income for WINK was $600,000 in 2017.

Calculate Basic EPS. To receive full credit, you must show all of your work in the space provided below.

Calculate Diluted EPS. To receive full credit, you must show all of your work in the space provided below.

Solutions

Expert Solution

Basic EPS= net profit/loss (after accounting for post tax preference dividend) divided by weighted average number of equity shares outstanding

net profit= 600,000

preference dividend = 8%*100*10,000=80,000

weighted average equity shares outstanding is

200,000 for 12 months=> weight is 1
25,000 for 10 months=> weight is 10/12= 0.833
Total weighted average equity shares outstanding is (200,000*1+25,000*0.833)= 220833.3333= 220,833

Basic EPS= (600,000-80,000)/220,833= $2.35 per share

Diluted EPS= worst case scenario if options are converted into shares.

proceeds received if they exercise the option= 45*25,000= 11,25,000
number of shares that could be purchased back with above from market= 11,25,000/50= 22,500
so 25,000 shares have been created but with the proceeds from option exercising we can buy back 22,500 from market so net shares created are only 25000-22,500=2,500

diluted eps= (600000-80000)/ (220833+2500)= $2.32 per share

jeff jeffy answered 1 year ago
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