In: Accounting
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?
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