Question

The information below pertains to Stellar Company for 2021.

Net income for the year		$1,240,000
7% convertible bonds issued at par ($1,000 per bond); each bond is convertible into     30 shares of common stock		1,970,000
6% convertible, cumulative preferred stock, $100 par value; each share is convertible      into 3 shares of common stock		3,970,000
Common stock, $10 par value		6,010,000
Tax rate for 2021		20%
Average market price of common stock		$25 per share

There were no changes during 2021 in the number of common shares, preferred shares, or convertible bonds outstanding. There is no treasury stock. The company also has common stock options (granted in a prior year) to purchase 70,100 shares of common stock at $20 per share.

(a) Compute basic earnings per share for 2021. (Round answer to 2 decimal places, e.g. $2.55.)

Basic earnings per share

$

(b) Compute diluted earnings per share for 2021. (Round answer to 2 decimal places, e.g. $2.55.)

Diluted earnings per share

$

Answer 1

Answer
Net income = $12,40,000
Dividend on preference shares = 39,70,000*6%=	$      2,38,200
Number of common stock outstanding = 60,10,000/10=6,01,000
a Basic EPS = Net income-Preference Dividend/Common stock outstanding
=(12,40,000-2,38,200)/6,01,000= $1.66 (rounded off)
Net Income	$    12,40,000
DILUTED EPS
Interest on convertible bonds (1970,000*7%)	$      1,37,900
After Tax amount(1-20%)	$      1,10,320
Number of bonds	1,970
Number of equivalent common shares @30 Anti dilution	59,100
Stock Options	70,100
Price	20
Value of Stock Options	14,02,000
Divided by Average Market price	25
Number of common stock	56,080
Incremental shares	14,020
Preference Shares	39,700
Preference dividend	2,38,200
Number of Equivalent common shares@3	1,19,100
Anti dilution	2
Numerator for Diluted EPS (Net Income- Preferred Dividend+Interest savings+ Preferred Dividend)
(12,40,000+2,38,000-2,38,000+1,10,320)	13,50,320
Total number of shares outstanding	7,93,220
(6,01,000+14,020+59,100+1,19,100)
Diluted EPS	1.70

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