Question

Boeing had $1,000,000 net income in 2018. On January 1, 2018, there were 200,000 shares of common stock outstanding. There are 30,000 options to buy common stock at $40 a share outstanding. The market price of the common stock averaged $50 during 2018. The tax rate is 30%.

During 2018, there were 40,000 shares of preferred stock outstanding. The preferred is $100 par, pays $3.50 a year dividend.

Boeing issued $2,000,000 of 8% convertible bonds at face value during 2017. Each $1,000 bond is convertible into 30 shares of common stock.

Required:

Prepare the Basic and Diluted Earnings per Share for Boeing for FY2018.

What does “diluted” mean in “Diluted Earnings per Share”?

What does “anti-dilutive” mean as it relates to Earnings per Share? What causes antidilution?

Answer 1

Calculation of Basic earning per share
Particulars	$
Net income	$        1,000,000
Less Dividend to preferred stockholder's	$           140,000
Net income available to common Stockholders	$           860,000
Weighted average number of Common stockholder	200000
Basic earning per share	$                  4.30
Calculation of Diluted Earning per share
Particulars	$
Numerator for Diluted EPS
Net income available to common Stockholders	$           860,000
Add : Savings of interest due to conversion of bonds into common stock with tax effect	$           112,000
Net income for Diluted EPS	$           972,000
Denominator for Diluted EPS
Outstanding opening common stock	200,000
Add Due to common stock options	30,000
Less Repurachse of common stock from the proceeds of stock option	(24,000)
Add Bonds converted to common stock	60,000
Total common stock outstanding	266,000
Diluted EPS	$                  3.65

Diluted means the effect of certain security will result in rise in number of Common stock outstanding ultimately which will result in decrease in Baisc EPS.

Anti-Dilutive means the effect of certain security will result in decline in number of Common stock outstanding ultimately which will result in increase in Baisc EPS. The securities which will tend to decrease in number of common stock outstanding are ignored and are not considered for calculation of diluted EPS.

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