Question

On January 1, 2021, Johannesson&Johannesson had 480,000 common shares ($1 par) outstanding. These were originally sold for $30 per share, and 6,000 shares of 10% cumulative preferred stock ($100 par), convertible into 60,000 common shares.

On October 1, 2021, Johannesson&Johannesson issued and sold an additional 16,000 shares of common stock at $37. At December 31, 2021, there were 22,000 incentive stock options outstanding, issued in 2020, and exercisable after one year for 22,000 shares of common stock at an exercise price of $34. The market price of the common stock at year-end was $52. During the year, the price of the common shares had averaged $44.

Net income was $620,000. The tax rate for the year was 25%.

Your task:
Please compute both the basic and the diluted EPS for the year ended December 31, 2021. (Round "Earnings per share" answers to 2 decimal places. Enter your answers in thousands.)

	Numerator / Denominator = Earnings per share Basic / = Diluted / =

Answer 1

Basic EPS = net income / weighted average shares

= 620,000 / 484,000

= 1.28

Net income = 620,000

Weighted average shares = (480000 × 12/12) + (16000 × 3/12) = 480,000 + 4000 = 484000.

Diluted EPS :

1. Preference share :

Increase in earnings = 6000 shares × 100 par × 10% = $600,000

Increase in number of shares = 60000 shares

Increamental EPS = 60000 / 60,000 = 1

2.Stock option :

Average price would be taken into consideration.

Increse in earning = 0

Increase in number of shares (Shares issued without consideration ) = 22000 × (44 - 34) / 44 = 5000

Increamental EPS = 0/5000 = 0

Diluted EPS = Earnings + Increase in earnings / weighted average shares + Increase in number of shares

= 620,000 + 0 (Option) + 60,000 (Pref. Shares) / 480,000 + 5000 (Option) + 60,000 (Pref. Shares)

= 680,000 / 545000

= 1.25

Answer =

Basic = 620,000 / 484,000 = 1.28

Diluted = 680,000 / 545000 = 1.25

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