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On January 1, 2019, UMB Corporation had 1,000,000 shares of common stock outstanding. On April 1,...

On January 1, 2019, UMB Corporation had 1,000,000 shares of common stock outstanding. On April 1, the corporation issued 200,000 new shares to raise additional capital. On July 1, the corporation declared and issued a 2-for-1 stock split. On Nov. 1, the corporation purchased 600,000 treasury shares from the market. In addition, in 2018, UMB issued 5,000, $1,000 face value, 10% 10-year convertible bonds at par value. Each bond is convertible into 100 shares of common stock. The par value of the common stock is $1. No bonds were converted into common stock in 2019. Net income for 2019 is $3,000,000. The company has no preferred stock. Assume the tax rate is 20%.

a) What is the number of weighted average shares outstanding to be used in computing basic earnings per share for 2019?

b) Compute basis EPS for 2019.

c) Compute diluted EPS for 2019.

Expert Solution

SOLUTION:

a) Number of weighted average shares outstanding:

	Increase (Decrease)	Outstanding	Months Outstanding		Share Months
Jan 1	-	1,000,000	3	2/1	6,000,000
April 1	200,000	1,200,000	3	2/1	7,200,000
July 1	2,400,000	3,600,000	3		10,800,000
Oct 1	(600,000)	3,000,000	3		9,000,000
			12		33,000,000

		Weighted average number of shares	2,750,000
			(33,000,000/12)

b) Basic EPS:

EPS =	(Net Income - Preferred Dividend)/Weighted average number of shares
EPS =	(3,000,000 - 0) / 2,750,000
EPS =	1.09

c) Diluted EPS:

Number of Increamental shares = 5000 * 100 = 500,000 shares

Increase in Profit due to interest on bonds = 5,000,000 * 10% * (1-t)

= 500,000 (1-0.20)

= 400,000

Diluted EPS = Net Income + Interest (Net of Tax) / Weighted Average share + Increamental shares

= 3,000,000 + 400,000 / 2,750,000 + 500,000

= 3,400,000 / 3,250,000

Diluted EPS = 1.05

ekkarill92 answered 1 year ago

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