Question

Net income for the year		$1,210,000
7% convertible bonds issued at par ($1,000 per bond); each bond is convertible into     30 shares of common stock		2,000,000
6% convertible, cumulative preferred stock, $100 par value; each share is convertible      into 3 shares of common stock		4,080,000
Common stock, $10 par value		6,130,000
Tax rate for 2021		20%
Average market price of common stock		$25 per share

There were no changes during 2021 in the number of common shares, preferred shares, or convertible bonds outstanding. There is no treasury stock. The company also has common stock options (granted in a prior year) to purchase 74,200 shares of common stock at $20 per share.

(a) Compute basic earnings per share for 2021.

Basic earnings per share

$1.57

(b) Compute diluted earnings per share for 2021.

Diluted earnings per share

$

Answer 1

Computation of EPS
Basic EPS	1.57
(net income-preference dividend/weighted no. of shares)
(1210000-244800)/613000
Diluted EPS	1.54
(Net income+Dilution effects/No. of shares+Dilutive shares)
(965200/627840)

Note: Preferred stock are Anti dilutive and Convertible bonds also, So these should be excluded from this computation of diluted EPS.

Workings:

	Increase in Net income	Increase in Shares	Consider or not
Stock Options	NIL	14840	Consider
Perefrence covertible stock	244,800	122400	Not consider
	(4080000*6%)	(40800*3)
Convertible Bonds	112,000	60,000	Not consider
	(20,00,000*7%*80%)	(2000*30)
Current Earning and Shares	965,200	613000
Total	965,200	627,840

Effects of Options on Diluted EPS
Amount Paid=	Options Issued*EP Per Share	1,484,000
	(74200*20)
Value of Options in current shsres	Amount Paid/CMP	59,360
	(1484000/25)
Diluted Shares=	Options issued- Value of options in Current shares
	(74200-59360)	14,840	Shares