Question

The following transactions took place for fiscal year 2020 related to common stock:

January 1, beginning balance ..............................................  30,000 shares

April 1, issuance ..................................................................  10,000 shares

June 1, 15% stock dividend

July 1, treasury stock acquisition .............................. 7,500 shares

September 1, 2:1 stock split .......................................

November 1, issuance ............................................. 15,000 shares

6% $100 par value convertible, cumulative preferred stock 2,000 shares

Issued at $105.
Convertible into 2,000 shares of common stock.

Stock options ................................... 6,000 shares
Option/ Exercise price .................................... $20

Average market price ................................. $25

December 31st market price ................................. $40

January 1st market price ................................. $42

Requirements:
Net income for 2020 was $230,000. The company's tax rate is 30 percent. No conversions or options were exercised during 2020.

Compute Weighted-Average Common Stock Outstanding

Compute basic earnings per share.

Compute diluted earnings per share. State whether or not this calculation results in dilutive or antidilutive EPS.

Answer 1

EPS = Net Income available to common stock holders / Weighted Average number of common stock outstanding

For Basic EPS

• Net Income available to common stock holders = $230,000 - (6% of 100 * 2000 shares) = $218,000
• Weighted Average number of common stock outstanding =

Beginning Balance	30,000 * 12 / 12	30,000
April 1 Issuance	10,000 * 9 / 12	7,500
15% stock dividend	15% of (30000 + 7500) (same weighted average period outstanding as the original share)	5,625
July 1, Treasury stock acquisition	7500 * 6 /12	-3,750
Total for stock split		39,375
Stock split		39,375
November 1 Issuance	15000 * 2 /12	2,500
Total		81,250

Therefore Weighted Average number of shares = 81,250

Basic EPS = 218,000 / 81250 = 2.6831

For Diluted EPS

• Net Income available to common stock holders = $218,000 + $12,000 = $230,000
• Weighted Average number of common stock outstanding =

Weighted number of shares for Basic EPS		81,250
Conversion of Preference share		2,000
Stock option	6000 - (6000* 20 / 25)	1,200
Weighted number of shares for Diluted EPS		84,450

Diluted EPS = 230,000 / 84450 = 2.7235

Since Diluted EPS > Baisc EPS, these calculations result in anti dilutive.

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