Question

Trinity Railway began 20X5 with 900,000 shares of common stock outstanding. On March 1, 20X5, Trinity Railway issued 300,000 additional shares of common stock. 50,000 shares of common stock were reacquired on October 1. Trinity Railway reported net income of $2,275,000 for the year ending December 31, 20X5. Trinity Railway paid $250,000 in common dividends during 20X5.

A) Calculate the weighted-average common shares outstanding for 20X5.

B) Calculate basic earnings per share for 20X5.

**(MOST IMPORTANT)** C) If Trinity Railway also had preferred stock outstanding, and declared and paid $227,500 in dividends on these shares during 20X5, calculate the revised amount for basic earnings per share.

**(MOST IMPORTANT)** D) Explain the concept of diluted EPS. What types of additional securities would Trinity Railway likely need to issue before it would be become necessary to calculate a diluted EPS amount?

Answer 1

(a)
	Time Interval	Portion of Year	Shares Outstanding During Time Interval	Calculations	Weighted-Average Impact
	Jan. 1 through Feb. 28	2 months	900000	2/12 * 900,000 =	150000
	March 1 through Sept. 30	7 months	1,200,000 (900,000 + 300,000)	7/12 * 1,200,000 =	700000
	Oct. 1 through Dec. 31	3 months	1,150,000 (1,200,000 - 50,000)	3/12 * 1,150,000 =	287500
		12 months			1137500
(b)	Basic EPS = Income Available to Common ÷ Weighted-Average Number of Common Shares Outstanding
	$2.00 = $2,275,000/1,137,500
(c)	Basic EPS = Income Available to Common ÷ Weighted-Average Number of Common Shares Outstanding
	$1.80 = ($2,275,000 - $227,500)/1,137,500
(d)	Diluted EPS is for companies that have more complex capital structures involving stock options, warrants, convertible bonds, or convertible preferred stocks that are potentially to be exchanged for common shares. If Trinity were to issue such securities, then the EPS reporting would additionally include disclosure of a diluted EPS value that reflects the potential impact of such securities.