Question

WildhorseCorporation is preparing earnings per share data for 2020. The net income for the year ended December 31, 2020 was $410,000 and there were 59,700 common shares outstanding during the entire year. Wildhorse has the following two convertible securities outstanding:

10% convertible bonds (each $1,000 bond is convertible into 20 common shares)		$100,000
3% convertible $100 par value preferred shares (each share is convertible into 2 common shares)		$53,000

Both convertible securities were issued at face value in 2017. There were no conversions during 2020, and Wildhorse’s income tax rate is 22%. The preferred shares are cumulative. For simplicity, ignore the requirement to record the debt and equity components of the bonds separately.

Calculate Wildhorse’s basic earnings per share for 2020. (Round answer to 2 decimal places, e.g. 15.25.)

Basic earnings per share

Recalculate Wildhorse’s basic and diluted earnings per share for 2020, assuming instead that the preferred shares pay a 15% dividend. Calculate the income effect of the dividends on preferred shares. Dividends on preferred shares Calculate Wildhorse's basic earnings per share for 2020. (Round answer to 2 decimal places, e.g. 15.25.) Basic earnings per share $enter Basic earnings per share in dollars rounded to 2 decimal places Calculate Wildhorse's dilutive earnings per share for 2020. (Round answer to 2 decimal places, e.g. 15.25.) Diluted earnings per share $enter Diluted earnings per share in dollars rounded to 2 decimal places

Answer 1

(a)	(pay a 15% dividend)
	Basic Earnings Per Share	Income	Shares	EPS
	Income	$410,000
	Dividends on preferred shares	-$7,950
	($53,000 X 15%)
	Basic EPS	$402,050	59,700	$6.73
(b)
	Basic Earnings Per Share	Income	Shares	EPS
	Income	$410,000
	Dividends on preferred shares	-$1,590
	($53,000 X 3%)
	Basic EPS	$408,410	59,700	$6.84
	Diluted Earnings Per Share	Income	Shares	EPS
	Basic EPS	$408,410	59,700	$6.84
	Preferred shares	$1,590	1,060
		$410,000	60,760	$6.75
	Bonds	$7,800	2,000
	Diluted Earnings Per Share	$417,800	62,760	$6.66
	Working
	Interest expense	$10,000
	($100,000 x 10%)
	Tax Rate @22%	$2,200
	After-tax interest	$7,800