Question

Paul Company had 100,000 shares of common stock outstanding on January 1, 2021. On September 30, 2021, Paul sold 38,000 shares of common stock for cash. Paul also had 5,000 shares of convertible preferred stock outstanding throughout 2021. The preferred stock is $100 par, 5%, and is convertible into 3 shares of common for each shares of preferred. Paul also had 400, 7% convertible bonds outstanding throughout 2021. Each $1000 bond is convertible into 30 shares of common stock. The bonds sold originally at face value. Reported net income for 2021 was $24,000 with a 40% tax rate. Common shareholders received $100 per share dividends after preferred dividends were paid in 2021.

Required: Compute basic and diluted earnings per share for 2021. (Round your answer to decimal places.)

Answer 1

**Seems like the net income would be 240,000; and not 24,000. I have considered net income as 240,000 only for the solution

1. Basic EPS

Net Income		240,000
Less: Preferred dividend	500,000 x 5%	(25,000)
Income available to common shareholders		215,000
Weighted Avg outstanding shares
Opening balance		100,000
Shares issued on 30th sept [38,000 x 3/12]		9,500
Total		109,500
Basic EPS	215,000/ 109,500	$1.96

2. Diluted EPS

Net Income		240,000
Add: Interest net of tax	400,000 x 7% x (1 - 0.40)	16,800
Income available to common shareholders		256,800
Potential shares (bond conversion)	400 x 30	12,000
New EPS	256,800/ (109500 + 12000)	2.11
As the bonds are anti-dilutive securities (EPS has increased from 1.96 to 2.11); the same will not be considered for calculating Diuted EPS
Potential shares (Preferred stock)	5000 x 3	15,000
Diluted EPS	240,000/ (109,500 + 15,000)	$1.93