Hanson Co. had 200,000 ordinary shares, 20,000 shares of convertible preference shares, and HKD 1,000,000 of...

Hanson Co. had 200,000 ordinary shares, 20,000 shares of convertible preference shares, and HKD 1,000,000 of 10% convertible bonds outstanding during 2019. The preference shares are convertible into 40,000 ordinary shares. During 2019, Hanson paid dividends of HKD 1.20 per share on the ordinary shares and HKD 4 per share on the preference shares. Each HKD 1,000 bond is convertible into 45 ordinary shares. The net income for 2019 was HKD 800,000 and the income tax rate was 30%.

6. Basic earnings per share for 2019 is (rounded to the nearest penny)

A. HKD 2.94.

B. HKD 3.22.

C. HKD 3.35.

D. HKD 3.60.

7. Diluted earnings per share for 2019 is (rounded to the nearest penny)

A. HKD 2.77.

B. HKD 3.05

C. HKD 3.33.

D. HKD 3.55.

Solutions

Expert Solution

Basic and Diluted EPS differs we doesn't consider the possible convertible to equity shares for the calculation of Basic EPS but Diluted considers.

6 )Basic EPS = Income available to equity shareholders/ Weighted avg no of common shares outstanding

= Income available to equity shareholders is net income - dividend paid to preference shareholders

= 800000- 4* 20000= 800000-80000= 720000

= and shares 200000

Basic EPS = 720000/200000= 3.60 per share

7) Diluted EPS = Income available to equity shareholders/ Weighted avg no of common shares outstanding

The Net income would the same for both calculation but the denominator gets change, because of possible convertible shares to ordinary shares

= Income should increase because of converting 10% of bonds to ordinary shares, how means paying tax is less what it would be done before so 30000 is the tax amount to add Net income = 720000+30000= 750000

= Shares = preference shares to ordinary shares + 40000 ordinary shares

Bonds to ordinary = +4500 shares

The total shares is 200000+ 40000+4500=244500

Diluted EPS = 750000/244500 = 3.06

jeff jeffy answered 1 year ago

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