Question

The following data relates to Rogers Company for the year ending December 31, 2020:

Net Income for 2020= $920,000

Preferred Stock= 10,000 shares of $100 par 8% cumulative preferred stock were outstanding throughout the year. The preferred stock is non-convertible

Common Stock= 300,000 shares of common stock were issued and outstanding throughout the year. No shares were issued or repurchased, and there were no stock splits or dividends.

Convertible Bonds= 12% convertible bonds at $4,000,000 face amount. (These bonds were issued in 2015 and they are convertible to a total of 120,000 common shares.

Stock Options=500,000 (These options were issued on July 1, 2020. Each option allows the option holder to purchase one common share for $20. The average market price of the common stock in 2020 was $32 a share.

Other information:

Rogers income tax rate for 2020 is 40%

Rogers did not declare or pay any dividends in 2020

Question:

a. What is Rogers "Income available to common shareholders" for 2020?

b. What is Rogers "Weighted average common shares outstanding" for 2020?

c. Compute Rogers Basic Earnings Per Share for 2020?

d. What will be the "Numerator Effect of the convertible bonds?

e. What will be the "Denominator Effect" of the convertible bonds?

f. What will be the "Numerator Effect" of the stock options?

g. What will be the "Denominator Effect" of the stock options?

h. Compute Rogers Diluted Earnings Per Share for 2020?

Answer 1

answer to question a:

income available to common shareholders= net income- preference dividend

=920000- 80000 = 840000

Note: preference dividend is calculates as:

(8/100)*100 = 8 per share

Total dividend = 8* 10000 = 80000

Answer to question b:

Weighted avg common shares outstanding=

date	Shares outstanding	Period covered	Weighted shares
Jan 1	300000	1	300000
July 1	500000	0.5	250000
Weighted average shares outstanding			550000

Answer to question c,

Earnings per share = net income- preferece dividend/outstanding shares

= 920000-80000/300000= 2.8

Answer to question d:

If the numerator effect is greater than the denominator effect, EPS will rise. If convertible bonds are converted, there is no interest expense, so net income goes up

Answer to question e:

If it is assumed that the bonds were converted, the accountant should add to the denominator the number of common shares that would be issued if all the bonds were exchanged.

Answer to question f:

Common stock options do not affect EPS numerator

Answer to question g:

Stock options results in increase in denominator as more number of shares are added up to the total number of shares

answer to question h:

In a normal scenario where details of all adjustments are available, we would use the following formula:

Diluted Earnings Per Share = (net income– Preferred Dividends) / (Shares Outstanding + Unexercised Employee Stock Options + Convertible Preferred Stocks + Convertible Debt + Warrants)

= (920000-80000)/(300000+500000+120000)

=840000/920000

=0.913