Question

The following information was extracted from Mathis Corporation's 2016 annual report:

Common stock
Shares outstanding 12/31/15 90 million
New shares issued 04/01/16 10 million
Shares outstanding 12/31/16 100 million

Preferred stock
$10 par, 10%, convertible into 2 shares of common stock, shares outstanding 50 million

Options
1 million options, each to purchase one common share at $50 per share

Market price of stock
Average for year $75
Beginning of year $70
End of year $78

Preferred dividends paid $50,000,000
Net income for 2016 $350,000,000

Required:
A. Calculate basic earnings per share for 2016? (5 points)
B. What is diluted earnings per share for 2016? (5 points)
C. What does EPS mean? (3 points)
C. What does "antidilutive securities" mean? (3 points)

Please show calculations.

Answer 1

A) Net Income = $350,000,000

Preferred Dividend Paid = $50,000,000

Basic Earnings per Share = (Net Income - Preferred Dividend)/average shares outstanding

Average shares outstanding = (Shares At the beginning + Shares at the end)/2

= (90,000,000 + 100,000,000)/2

= 190,000,000/2 = 95,000,000

Basic EPS = ($350,000,000 - $50,000,000)/95,000,000

= $300,000,000/95,000,000 = $3.16

B) Diluted EPS = (Net Income - Preferred Dividend)/(Outstanding shares + diluted shares)

Diluted Shares = Options issued - Value of options in current shares

Options issued = 1,000,000 at $50/share

Amount paid = 0ptions issued x exrcise price per share

= 1,000,000 x $50 = $50,000,000

Value of options in current shares = amount paid to exercise options/avg market price

= $50,000,000/$75 = 666,667

Diluted shares = Options Issued - Value of options issued in current shares

= 1,000,000 - 666,667 = 333,333

Diluted EPS = ($350,000,000 - $50,000,000)/(95,000,000 + 333,333)

= $300,000,000/95,333,333

= $3.17

C)  

Earnings per share (EPS) is the portion of a company's profit available for common stockholders allocated to each outstanding share of common stock. Earnings per share serves as an indicator of a company's profitability. EPS is calculated as:

EPS = (Net Income - Preferred Dividens) / Average Outstanding Shares

D)

Antidilutive securities refers to financial instruments that are not in the form of common stock, but when converted into common stock will increase earnings per share.