Question

carter constructiob had net income of 350,000. They began the year with 25,000 common shares issued and outstanding. On June 30, they issued 10,000 additional shares. There were no other transactions affecting common stock. The average market price of the common stock during the year was $30/share. The market price of the common stock at the end of the year was $34/share. The company's marginal tax rate is 20%.

The following information pertains to securities issued by the company. Each security was outstanding during the entire year.

1.     5,000 options to buy common stock with an exercise price of $28/share. In addition, there is $4 of unrecognized compensation cost associated with eachoption.

2.     10,000 shares of 5%, $100 par, cumulative, non-convertible preferred stock with an average market price of $105/share and an ending market price of$108/share.

3.      2,000 shares of 7%, $100 par, cumulative, convertible preferred stock withan

average market price of $109 and an ending market price of$107/share. Each share of preferred stock is convertible into 5 shares of common stock.

4.     200 $1,000 bonds with a stated interest rate of 10%, convertible into 50 shares of common stock, issued at 105. The premium is being amortized at the rateof

$500/year.

Compute Carter Construction's Basic Earnings per Share (5 points):

Given the information that you have about the options, are they potentially dilutive? Why or why not (3 points)?

Given the information that you have about the shares of the 5%, $100 par preferred stock, are they potentially dilutive? Why or why not

Given the information you have about the shares of the 7%, $100 par preferred stock, are they potentially dilutive? Why or why not

Given the information you have about the I 0% bonds, are they potentially dilutive? Why or why not

Rank each potentially dilutive security, beginning with the most dilutive

Compute diluted earnings per share (6 points).

Answer 1

EPS
Net Income		350000
Shares		25000
additional shares		5000 (10000*6/12)	issued at 30th june
Earning per share		11.67

Type	Adjustments	Adjusted income	share	Cumulative shares	EPS
options	-	350000	5000	35000	10
non- convertible 5% preferred stock	50000 (10000*100*5%)	300000	10000	45000	6.67
convertible 7% preferred stock	70000 (10000*100*7%)	230000	10000	55000	4.18
convertible common stock	100000 (10000*100*10%)	130000	10000	65000	2

The most common types of dilutive securities are:

1. Options. These instruments give the holder the option to acquire shares at a certain price, and within a certain date range. Options are issued to employees.

2. Non-Convertible 5% preferred stock- These are preferred shares, usually paying a dividend, that can be converted into common stock.

3. Convertible 7% preferred stock- These are preferred shares, usually paying a dividend, that can be converted into common stock.

4. Convertible 10% bonds.- These are debt instruments that give the holder the option to convert them into common stock.