Question

In: Accounting

During all of Year 4, our company had 200,000 common shares outstanding. During all of Year...

During all of Year 4, our company had 200,000 common shares outstanding.

During all of Year 4, there were 30,000 outstanding call options to buy common shares at $40 a share; and there were 20,000, $7, no par value, cumulative and convertible preferred shares outstanding. Each preferred share is convertible into three common shares.

During all of Year 4, we had outstanding $2,000,000 of 8% convertible bonds issued at face value. Each $1,000 bond is convertible into 20 common shares.

Year 4 net income was $750,000.

Instructions

Calculate basic and diluted earnings per share for Year 4. Prepare a schedule like we did in class and show all calculations for possible part marks.

Solutions

Expert Solution

Calculation of Basic EPS:

Basic EPS = Earnings available to common stock holders/Weighted average no. of common shares outstanding

Earnings Available to common stock holders:

Net income = 750,000

less: Preferred Shares Dividend = 7*20000 shares = 140,000

Earnings available to common stock holders = $ 610,000

NO. of common shares outstanding = 200,000 shares

Therefore, Basic EPS = 610000/200000 =$ 3.05 per share

Calculation of Diluted EPS:

Diluted EPS = Earnings available to common stockholders/Weighted average no. of possible common shares outstanding

Earnings Available to common stock holders:

Net income = 750,000

less: Preferred Shares Dividend = 7*20000 shares = 140,000

Add: Interest on Convertible bonds= interest(1-tax rate)* = 160,000

Earnings available to common stock holders = $ 770,000

* here no tax rate was given in the question. Hence, assumed as no tax

Weighted Average no. of possible common shares outstanding calculated as follows:

Common shares outstanding throughout the year = 200,000 shares

Call options outstanding throughout the year = 30,000 shares

Cumulative and convertible preferred shares outstanding(20000*3) = 60,000 shares

Convertible bonds outstanding throughout the year=2000000*20/1000 = 40,000 shares

Total Weighted average no. of Possible common shares outstanding = 330,000 shares

Diluted EPS = $ 770,000/330,000 shares = 2.33 per share

ekkarill92 answered 1 year ago

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