Question

Computing EPS with Multiple Potentially Dilutive Securities

Spencer Inc.'s 2020 earnings of $1,100,000 reflect a tax rate of 25%. During the year, Spencer had the following securities outstanding:

240,000 shares of common stock. 10,000 shares of 6%, $100 par, nonconvertible, cumulative preferred stock.

10,000 shares of 6%, $100 par, cumulative preferred stock, each convertible into 1.75 shares of common stock.

1,000 bonds, $1,000 face value, 8% interest, each convertible into 30 shares of common stock (issued at face value).

400 bonds, $1,000 face value, 6% interest, each convertible into 20 shares of common stock (issued at face value).

a. Compute basic EPS amount for

Net Income Available to Common Stockholders,

Weighted Avg. Common Shares Outstanding,

Per Share.

b. Compute diluted EPS for:

Net Income Available to Common Stockholders

Weighted Avg. Common Shares Outstanding

Per Share

Answer 1

	S No	Particulars	Earnings		Weighted number of shares
			Amt	Workings	No. of shares	Workings		Formula and calculation
		A) Baisc EPS					=	Earnings available to equity shareholders
							Weighted no of equity shares
		Earnings avaiable to equity share holders	$ 11,00,000.00		240000
		Total	$ 11,00,000.00		240000
								$ 11,00,000
		Basic EPS					=	240000
							=	4.58
		B) Diluted EPS						Earnings available to equity shareholders + Preference dividend + Interest on Bonds (1-tax%)
							=	Weighted no of equity shares
	1	Earnings avaiable to equity share holders	$ 11,00,000.00		240000
	2	Preference dividend	$       60,000.00	10000 X $ 100 X 6%	17500	10000 X 1.75
	3	Interest on convertable bonds
		(for 1000 bonds) convertable into 30 shares	$       60,000.00	1000*$ 1000*8% X (1-0.25)	30000	1000 X30
		(for 400 bonds) convertable into 20 shares	$       18,000.00	400*$ 1000*6% X (1-0.25)	8000	400 X 20
								$ 12,38,000
		Total	$ 12,38,000.00		295500		=	295500
		Diluted EPS					=	4.19
	Notes
	1. Assuming that Earnings given in the question was earnings available to equity shareholders