Question

                     Earnings Per Share Example

Consider the following information for Wichtel Corporation. Assume that the weighted average shares were 500,000 shares.

Preferred Stock:

5%, $100 par convertible cumulative preferred stock issued at par, convertible into 20,000 shares of common               stock $200,000

6%, $100 non convertible cumulative preferred stock issued at $102;   $300,000

Stock options                          50,000 shares                      

Option Exercise Price             $20 per share

Average market price              $31

Year-end market price             $28

Bonds:

8%, $1,000 par, issued at par, convertible into 16,000 shares of common stock                   $200,000

9%, $1,000 par, issued at par, convertible into 7,000 shares of common stock $100,000.

Net income for year is $400,000. The company's tax rate is 35%. No actual conversions occurred, and no options were exercised during the year.

Required:

1. Compute basic earnings per share

Basic EPS = ______________________________________________

2. Compute diluted earnings per share

Diluted EPS = _________________________________________________

Answer 1

Basic EPS
Net Income-preferred stock+interest exp /weighted avg outstanding common shares
Net Income-preferred stock
400000-(5%*200000)-(6%*300000)	372000
Diluted EPS
Net Income-preferred stock+interest exp after tax/weighted avg outstanding common shares+potensial shares
Net Income-preferred stock+interest exp after tax
400000-(6%*300000)+(200000*8%*65%)+(100000*9%*.65)	398250
Potential shares
Exercised 50000*20	1000000
For 1000000/28 no of shares that can be purchased	35714
Dilutive portion 50000-35714	14286
Convertible bonds (16000+7000)	23000
Convertible preferred stock	20000
weighted avg outstanding common shares+potensial shares
500000+14286+23000+20000	557286
	Numertaor	Denominator	EPS in $
Basic	372000	500000	0.74
Dilutive	398250	557286	0.71
If any doubt please comment