In: Accounting
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.
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 |