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.

Solutions

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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