Question

Tabb Corp has 9,293 shares of common stock outstanding at the beginning of the year. Net income was $359,293. No dividends were paid this year nor last year. On March 1^st, the company purchased 2,000 shares of its common stock and held it in treasury. There was a 2 for 1 stock split that occurred on common stock on Dec. 1. The tax rate is 30%. A $1,500,000, 5% nonconvertible bond was issued June 30 of the current year at par value. The company has 2,000 shares outstanding of $100 par value 5% convertible Preferred stock (cumulative and non-participating). The stock was issued at $125 a share on April 1 this year and has current market price of $145 at year-end. One share of preferred stock can convert into 2 shares of common stock, none were converted.

Calculate fully diluted EPS Is Fully Dilutes EPS a required?

Answer 1

Diluted earnings per share (diluted EPS) is essentially the earnings/income made on every share of a company that is calculated assuming that all the securities/preferred securities that are convertible were duly exercised.

Diluted EPS =

(Net Income - Preferred dividends) (No. of common shares outstanding + conversion of any dilutive or convertible securities)

($ 359,293 - $ 10,000) ( 7,293 + 4,000 ) = $ 30.93

Working Note :-

Preferred Dividends = ( 2,000 preferred shares $ 100 ) 5% = $ 10,000

Preferred dividends are always paid on the par value of preferred stocks.

No.  of common shares outstanding = Outstanding at the beginning - Purchased as a treasury stock

= 9,293 shares - 2,000 shares = 7,293 shares.

Diluted shares = One share of preferred stock can split into 2 shares of common stock. Therefore, no. of convertible shares = 2,000 2 = 4,000 convertible shares.

So, Total shares including diluted shares = 7,293 + 4,000 = 11,293 shares.

As mentioned in the beginning Diluted EPS determines the earning/income of the company per convertible share. Therefore, it is required because it includes convertible securities in the calculation.