Question

In: Accounting

I. Stan Corp. provides the following data for 20x1. Transactions in common stock: 1/1, beginning...

I. Stan Corp. provides the following data for 20x1.

Transactions in common stock:

1/1, beginning 300,000 shares

4/1, issuance 100,000 shares

8% $100 par nonconvertible cumulative preferred stock $100,000

Issued at par

6% $100 par convertible cumulative preferred stock $200,000

Issued at $105

Convertible into 20,000 shares

Stock options 60,000 shares

Option price $25

Average market price $35

Year-end market price $40

The net income for 20x1 is $2,300,000. The company’s tax rate is 30 percent. No conversion or options were exercised during 20x1.

Compute basic and diluted earnings per share.

Expert Solution

Answer:

Basic Earnings per share
Net income is income after decution of Taxes, so we need not deduct tax again from Net income

Net Income ( After Income Tax)	2300000
Less: Dividend on preferred stock
1) Non Convertible Cumulative preferred stock
100000 x 8%	8000
2) Convertible cumulative Preferred stock
200000 x 6%	12000

Earnings available to common stockholders	2280000
Weighted average Number of common stock shares	375000

Basic earnings per share	6.08
= Earnings available / weighted average Number of shares

Weighted average number of shares is calculated to give importance to time of issue .

Weighted average number of shares have been calculated as
Time	Number of common stock shares outstanding	Weight	Product
Full year	300000	1'	300000
1 april - 31 december	100000	9/12'	75000
	Weighted average Number of common stock shares		375000

Diluted Earnings per share can be calculated as

If convertible preferred stock took option of cmmon stock , they no longer be required to paid preferred dividend.
Earnings available to common stockholders	2280000
Add: Dividend on Convertible cumulative Preferred stock
200000 x 6%	12000
Adjusted earnings	2292000

For Stock option . we need to calculate amount raised through stock option
= 60000 shares x option price
= 60000 x 25 , = 1500000

Now we need to calculate how many shares can be bought using above amount

Average market price = $35

No. of shares = Amount Raised / average market price

= 1500000 / 35 , = 42857 shares

Change in common stock = Shares issued - shares bought back

= 60000 - 42857 , = 17143

Now

Weighted average number of common stock shares = 375000

Add: Convertible stocks = 20000

Add: Stock option excess = 17143

Adjusted Weighted average number of common stock shares = 412143

Diluted EPS = Adjusted Earnings / Adjusted Weighted average number of common stock shares

= 2292000 / 412143 , = 5.56

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