Question

1. Inge Brothers Inc. had the following items in its capital structure at December 31, 2019: Preferred stock, 10%, $8 par value, convertible into 46,200 common shares no earlier than 2020, issued at par value on July 1, 2019 (current market value, $8 per share).................................................................... $1,660,000

Common stock, $20 stated value, issued January 2, 2016 (current market value, $17 per share).................................................................. 1,200,000

Treasury stock, common, 10,000 shares, acquired on November 30, 2018........ 280,000

Common stock options, issued in 2016, exercisable for 22,000 shares, beginning in 2021, at a “strike” price of $15 per share. The cash that would be received from the option-holders from a hypothetical exercise of the options at December 31, 2019 would be sufficient for Inge Brothers to acquire 8,800 shares of its own common stock (as treasury stock).

Stock warrants outstanding, issued in exchange for legal services at June 30, 2019, convertible into 9,800 shares of common stock at the discretion of the warrant-holders, but not earlier than 2022. The hypothetical conversion of the warrants at December 31, 2019 would require a cash payment from the warrant-holders, which would be sufficient for Inge Brothers to acquire 5,440 shares of its own common stock (as treasury stock) .................... 220,000

Additional paid-in-capital.................................................................................... 760,000

Retained earnings................................................................................................ 460,000

Inge Brothers’ net income for 2019 was $553,000. As of December 31, 2019, the company’s Board of Directors had not yet declared the dividend for 2019 for the preferred shareholders. What earnings per share would Inge Brothers Inc. report for the year ended December 31, 2019? Prepare a schedule to support your answer.

Answer 1

basic earning per share

for calculating basic earning per share we have to deduct preferential divident from net income.

then divide that amount with number of equity (common) shares

here net income for 2019 was $553,000

Preferred divident =1660000*10% = 166000

Balance income for EPS = 553000-166000 =387000

total common shares

particulers	working	number of shares
shares issued on January 2016	1200000/20	60000
additional paid in capital	760000/20	38000
Total		98000

Basic Earning per Share = 387000/98000

=$3.949

Dialuted Earning per Share

Dialuted EPS = (Net income - preferred Dividends) / (Shares outstanding + Unexercised employee stock option+convertible preferred stock + convertible debt + Warrants)

calculation number of diluted shares

Particulers	no of shares	diluted amount	dialuted shares
convertible preferred stock	46200	(17-8)*46200=415800	415800/17=24458.82
Treasury stock	10000	(28-17)*10000=110000	110000/17=6470.59
Common stock option	22000	(22000-8800)*15=198000	198000/17=11647.06
Stock warrants	9800	(9800-5440)=4360	4360

Total diluted shares= 24458.82+6470.59+11647.06+4360= 46936 shares

net income for common stock holders = 553000- (1660000-(46200*8))*10%

=553000-129040

=423960

Diluted EPS =423960/((46936)+98000)

=423960/144936

=$2.925

EPS= Earning Per Share