Question

The following information is for Crane Limited for 2020:

Net income for the year		$2,230,000
8% convertible bonds issued at par ($1,000 per bond), with each bond convertible into 40 common shares		2,110,000
6% convertible, cumulative preferred shares, $100 par value, with each share convertible into 3 common shares		3,900,000
Common shares (400,000 shares outstanding)		4,000,000
Stock options (granted in a prior year) to purchase 65,000 common shares at $20 per share		850,000
Tax rate for 2020		30%
Average market price of common shares		$25	per share

There were no changes during 2020 in the number of common shares, preferred shares, or convertible bonds outstanding. For simplicity, ignore the requirement to book the convertible bonds’ equity portion separately.

Calculate the income effect of the dividends on preferred shares.

Dividends on preferred shares

$

Calculate basic earnings per share for 2020. (Round answer to 2 decimal places, e.g. 15.25.)

Basic EPS

$

Determine an incremental per share effect for 6% preferred shares. (Round earnings per share to 2 decimal places, e.g. 15.25.)

Potentially dilutive security		Incremental Numerator Effect		Incremental Denominator Effect		EPS
6% Preferred shares

Calculate the proceeds from assumed exercise of 65,000 options.

Proceeds from exercise of options

$

Calculate the incremental shares oustanding upon the exercise of options.

The incremental shares oustanding upon the exercise of options

Calculate the after-tax interest paid on the 8% bonds.

After-tax interest on bonds converted

Determine an incremental per share effect for 8% bonds. (Round earnings per share to 2 decimal places, e.g. 15.25.)

Potentially dilutive security		Incremental Numerator Effect		Incremental Denominator Effect		EPS
8% Bonds		$

Rank the potentially dilutive securities from most dilutive to least dilutive.

8% Bonds
6% Preferred shares
Options

Calculate diluted earnings per share for 2020. (Round earnings per share to 2 decimal places, e.g. 15.25.)

		Numerator		Denominator		EPS
Basic		$				$
6% Preferred shares8% BondsOptions
Sub Total
6% Preferred shares8% BondsOptions
Sub Total
6% Preferred shares8% BondsOptions
		$				$

Diluted EPS

Answer 1

Summary of answer

Basic earnings per share	4.99
Diluted Earnings per share	3.82

Part 1

Dividends on preferred shares	234,000
Basic EPS	5

Net income after tax	2,230,000
Less: dividend to preferred stock (3900000*6%)	234,000
Net income available for common stock holders	1,996,000
Net income available for common stock holders	1,996,000
Divided by: weighted average share in common stock	400,000
Basic earnings per share	4.99

Part 2

Convertible preferred stock
Adjustment in income for convertible preferred stock = preferred divided	234,000
Conversion ratio	3
Multiply by: Number of preferred stock (3900000/100)	39,000
Number of share adjusted	117,000

Numerator	234,000
Denominator	117,000
Effect EPS [6% Preferred shares]	2.00

Part 3

Stock options
Proceeds from exercise of options (65000*20)	1,300,000
Number of stock options outstanding	65,000
Less: Number of share purchased using average market price (1300000/25)	52,000
Number of common shares adjusted from the exercise of options	13,000

Proceeds from exercise of options	1,300,000
Incremental shares oustanding upon the exercise of options	13,000

Part 4

Convertible bond
Interest paid to bond (2110000*8%)	168,800
Less: tax on interest (168800*30%)	50,640
Adjustment in income for convertible bond	118,160
Conversion ratio	40
Multiply by: Number of bond (2110000/1000)	2,110
Number of share adjusted	84,400

After-tax interest on bonds converted	118,160
Numerator	118,160
Denominator	84,400
Effect EPS [8% bonds]	1.40

Part 5

Instruments	Increase in earning [A]	Increase in number of common shares [B]	Effect EPS (A/B]
Options	0	13,000	0.00
Convertible bond	118,160	84,400	1.40
Preferred stock	234,000	117,000	2.00

The order in which to include dilutive instruments (lowest Earning per incremental share considered First.)
1	Options
2	convertible bond
3	Convertible preferred stock

8% Bonds	2nd
6% Preferred shares	3rd
Options	1st

Part 6

Dilutive Earning per share
	Adjusted Net income	Dividedd by: Potential common share	Per share	Nature
As per Basic Earning per share	1,996,000	400,000	4.99
Add: options	0	13,000		Dilutive
Sub Total	1,996,000	413,000	4.83
Add: 8% Bond	118,160	84,400		Dilutive
Sub Total	2,114,160	497,400	4.25
Add: Preferred stock	234,000	117,000		Dilutive
Dilutive Earning per share	2,348,160	614,400	3.82

Diluted Earnings per share

3.82