Question

From the December 31, 2019 balance sheet:

Convertible Preferred Stock, 6% cumulative, $100 par value, 100,000 shares authorized, 50,000 shares issued and outstanding. Dividends to preferred shareholders have been declared on schedule. Each preferred share is convertible to 4 shares of common stock (already adjusted for the 5% stock dividend).

Common Stock, $1 par, 10,000,000 shares authorized, 2,400,000 shares issued and outstanding.

Convertible bonds payable, 6% interest rate, $7,000,000 balance at December 31, 2018, issued at a discount on March 15, 2014. Each of the $1,000 bonds is convertible into 10 shares of common stock (already adjusted for the 5% stock dividend).

WDW Enterprises reported $450,000 of Bond Interest Expense on the convertible bonds in 2019, before income taxes.
									Executive employees were granted 270,000 stock options (already adjusted for the 5% stock dividend) on October 1, 2019 with an exercise price of $40 per share. The options will become exercisable on January 2, 2020 and the exercise period expires on October 1, 2025. During the 2019 year the average market price per common share of WDW Enterprises was $60 per share.
WDW declared a 5% stock dividend on March 1, 2020 when the market price was $50 per share.
On July 1, 2020, WDW repurchased 100,000 shares at a cost of $54 per share.
On September 1, 2020, WDW Enterprises issued 400,000 common shares at $62 per share to raise funds for the acquisition of 20th Century Fox Technology.
									Net income for the 2020 year is $7,500,000, after tax. The income tax rate is 25%.

compute the Weighted Average Number of Common Shares for WDW Enterprises’ 2020 BASIC EARNINGS PER share

Compute Earnings Available to Common Shareholders for WDW Enterprises’ 2020 BASIC EARNINGS PER SHARE

Compute basic EPS

Determine WDW Enterprises’ 2020 DILUTED EARNINGS PER SHARE. Show computations that determine if any potentially dilutive security is dilutive or antidilutive.  

Computations for Convertible Preferred Stock (Incremental)

Computations for Convertible Bonds Payable (Incremental)

Computations for Stock Options (Incremental)

Weighted Average Number of Common Shares for WDW Enterprises’ 2020 DILUTED EARNINGS PER SHARE?

Earnings Available to Common Shareholders for WDW Enterprises’ 2020 DILUTED EARNINGS PER SHARE?

Compute diluted EPS

Answer 1

Weighted Average Number of Common Shares for WDW Enterprises’ 2020

	Shares	Outstanding Period	Weighted Average Shares
1-Jan	2,400,000	12/12	2,400,000
1-Sep	400,000	4/12	133,333
Weighted average shares outstanding			2,533,333

Earnings Available to Common Shareholders for WDW Enterprises’ 2020 = $7,200,000

Workings
Basic
Net Income		$    7,500,000
Preferred Dividend	100*50000*6%	$       300,000
		$    7,200,000

	Numerator	Denominator	Earnings per Share
Basic	$              7,200,000	2,533,333	$         2.84

DILUTED EPS

Convertible Preferred Stock (Incremental) (100,000*4) = 400,000 Shares

Dilutive security - EPS ($ 7,500,000 / 2,533,333 + 400,000) = $2.55

Convertible Bonds Payable (Incremental) (7,000,000/1000*100) = 70,000 Shares

Extra earnings on interest = $ 450,000

Antidilutive security - EPS ($7,200,000 + 337,500 / 2,533,333 + 70,000) = $2.89

Stock Options (Incremental) (270,000 - 270,000 * 40/60) = 90,000 Shares

Dilutive security - EPS ($ 7,500,000 / 2,533,333 + 90,000) = $2.74

Weighted Average Number of Common Shares for WDW Enterprises’ 2020 = 3,093,333

2533333+(400000+70000+90000) = 3,093,333

Earnings Available to Common Shareholders for WDW Enterprises’ 2020 =  $ 7,837,500

7500000+(450000*75%) = $ 7,837,500

	Numerator	Denominator	Earnings per Share
Diluted	$   7,837,500	3,093,333	$      2.53