Question

Assume that the following data relative to Eddy Company for 2021 is available:

Net Income for the year : $2,100,000;

On Jan.1,there are 700 ,000 shares of common shares outstanding

transactions in common shares:

May purchase of 60,000 treasury shares

June stock split 2-1

Nov issuance of 120,000 shares

8% Cumulative Convertible Preferred Stock: $1,000,000, convertible into 200,000 shares of common stock. (adjusted for split)

Stock Options: exercisable to 60,000 shares of common stock at the price of $25 per shares and the Average market price in 2021 is $30.(both prices are also adjusted for the split)

Compute the basic earnings per share for 2021 ?

Compute the diluted earnings per share for 2021?

Answer 1

BASIC EARNING PER SHARE:

Basic Earnings Per Share (BEPS)=(Net Income -Preferred dividend)/Weighted Average number of common stock outstanding

Net Income =$2,100,000

Preferred dividend =($1000000*8%)/12=$6667 (One Months dividend)

	A	B	C=B/12	D=A*C
	Shares Outstanding(adjusted for split)	Period Covered(number of months)	Weight	Weighted Shares
(700000*2)	1400000	5	0.416667	583333
(700000-60000)*2	1280000	6	0.5	640000
(1280000+120000)	1400000	1	0.083333	116667
				1340000

BEPS=($2100000-$6667)/1340000=$1.56

$1.56

DILUTED EARNING PER SHARE

Diluted Earnings Per Share (DEPS)=((Net Income -Preferred dividend)+(Convertible preferred dividend+ Convertible debt interest *(1-Tax Rate)))/(Average number of common stock outstanding+ Diluted Shares)

Convertible Preferred Dividend =$6667

Convertible Debt =0

Convertible debt interest =0

Diluted Shares:

Preferred Stock-200000

Diluted Shares From Stock Options:

Amount paid=(Number of Options)*Exercise Price=60000*$25=$1,500,000

Value of Options at current market Price =$1500000/$30=50,000

Number of diluted shares =Number of Options -Value of options at current market price=60000-50000=10000

Total number of diluted shares=1340000+200000+10000=1550000

Diluted Earning Per Share(DEPS)=$2100000/1550000=$1.35

DEPS=$1.35

$1.35