Question

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.

Answer 1

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