Problem 13 Nichols Corporation began the year 2014 with 25,000 shares of common stock and 5,000...

Problem 13 Nichols Corporation began the year 2014 with 25,000 shares of common stock and 5,000 shares of convertible preferred stock outstanding. • On May 1, an additional 9,000 shares of common stock were issued. • On July 1, 6,000 shares of common stock were acquired for the treasury. • On September 1, the 6,000 treasury shares of common stock were reissued. The preferred stock has a $4 per share dividend rate, and each share may be converted into two shares of common stock. Nichols Corporation’s 2014 net income is $230,000.

a) Compute basic earnings per share for 2014.

b) Compute diluted earnings per share for 2014.

Expert Solution

Solution a:

Computation of weighted average outstanding shares
Period	Outstanding shares	Fraction	Weighted average outstanding shares
1-Jan-14 to 30-Apr-17	25000	4/12	8333.33
1-May-14 to 30-Jun-17	34000	2/12	5666.67
1-Jul-14 to 31-Aug-14	28000	2/12	4666.67
1-Sep-14 to 31-Dec-14	34000	4/12	11333.33

Weighted average outstanding shares			30000

Earning for common shareholders = Net income - Preferred dividend = $230,000 - (5000*$4) = $210,000

Basic earning per share = Earning for common shareholders / Weighted average outstanding common shares

= $210,000 / 30000 = $7 per share

Solution b:

Earning for common shareholder after conversion of preferred share in to common stock = $230,000

Weighted average outstanding shares after conversion of preferred stock into common stock = 30000 + 5000*2 = 40000 shares

Diluted EPS = earnings for common shareholders after converion / Weighted average outstanding shares after conversion of preferred stock

=$230,000 / 40000 = $5.75 per share

ekkarill92 answered 1 year ago

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