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Computing Diluted EPS: Convertible Bonds and Convertible Preferred Stock Jones Corporation's capital structure follows. December 31...
Computing Diluted EPS: Convertible Bonds and Convertible Preferred Stock
Jones Corporation's capital structure follows.
| December 31 | 2020 | |
|---|---|---|
| Outstanding shares of stock | ||
| Common stock, outstanding shares | 242,000 | |
| Convertible preferred stock, outstanding shares | 22,000 | |
| 8% Convertible bonds | $2,200,000 |
During 2020, Jones declared and paid dividends of $3.00 per share on its preferred stock. The preferred shares are convertible in 44,000 shares of common stock. The 8% bonds are convertible into 66,000 shares of common stock. Net income for 2020 is $1,955,000. Assume that the income tax rate is 25%.
Required
a. Compute basic EPS for 2020.
b. Compute diluted EPS for 2020.
- Note: Round earnings per share amounts to two decimal places.
| Net Income Available to Common Stockholders |
Weighted Avg. Common Shares Outstanding |
Per Share |
|
|---|---|---|---|
| Basic EPS | Answer | Answer | Answer |
| Diluted EPS | Answer | Answer | Answer |
Solutions
Expert Solution
Answer:
a) Computation of EPS for 2020:
Basic EPS = (Earning available for equity shareholders / Weighted average common share outstanding)
= $1,889,000 / 242,000
= 7.81 Per share.
Note-1
Earning available for equity shareholders=( Net Income - Dividend on preferred stock)
= ($1,955,000 - $66,000)
= $1,889,000
Note-2 Assume Net Income provided above is after tax.
b) Computation of diluted EPS for 2020:
Basic EPS = (Earning available for equity shareholders / Weighted average common share outstanding)
= $2,087,000/ 352,000
= 593 Per-share.
Earning available for equity shareholders:
| Particulars | Amount |
| Net Income after dividend | $1889000 |
| Add: Interest on the debt (2,200,000x 8%) (1-25%) | $132,000 |
| Add: Preference Dividend | $66,000 |
| Total | $2,087,000 |
The weighted average common share outstanding
| Particulars | No. of shares |
| No. of common stock | 242,000 |
| No. of convertible preference shares | 44,000 |
| No. of the convertible debenture | 66,000 |
| Total | 352,000 |
,
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