Question

Question: HHQ1 LLC has projected a net income of $1 million USD in 2020. HHQ1 pays $100,000 total dividends to its 100,000 common shareholders outstanding @ the end of 2019 (Jan 01: 80,000 shares outstanding; July 01: 20,000 new shares were issued). The company also has 10,000 convertible preferred stocks ($5 dividend per P.S) and 2000 convertible bonds (10% coupon rate @$1000 par value). In 2020, 80% of the preferred stock holders may convert to common stocks (3 Common shares per preferred share). Also, 100% bondholders are allowed to convert to 2 common shares per bond. Tax rate 40%. Calculate both the basic and diluted EPS for HHQ1.

Answer 1

No.of shares	O/s for (days)	No.*Days
80000	181	14480000
100000	184	18400000
		32880000
Wted..	No.of shs.	90082.19	32880000/365

Basic Earnings per share=( Net income-Dividend on preferred stocks)/Wt. av. No.of common shares o/s

Earnings available to common shares=1000000-(10000*5)= 950000

Wt. av. no. common shares o/s= 90082.19

So, Basic EPS= 950000/90082.19=

10.55

Diluted EPS=Net income+After-tax cost of bond interest/Wt. av. No.of common shares o/s+Diluted Shares)

Net income-Preferred dividends (20%,not convertible)+After-tax cost of bond interest=1000000-(10000*20%*5)+(2000*1000*10%*(1-40%))=

1110000

Wt. av. no. common shares o/s= 90082.19

Preferred stock conversions possible= 10000*80%*3=24000 shares

Bond conversions possible= 2000*2= 4000

so, Diluted EPS=1110000/(90082+24000+4000)=

9.40

Tabulating the above,

	Basic EPS	Diluted EPS
Net income	1000000	1000000
Less: Preferred Dividend	50000	10000
Add: After-tax cost of interest	0	120000
Numerator	950000	1110000
Wt.average no. of common shares outstanding	90082	90082
Additional no.of shares --if preferred shares are converted	0	24000	10000*80%*3
Additional no.of shares --if bonds are converted	0	4,000	2000*2
Total no.of Basic/diluted shares----Denominator	90082	118082
Basic/Diluted EPS----- (Numerator/denominator)	10.55	9.40