Question

One company had 25,000 common shares outstanding during all of 2020. It also had 10,000 cumulative preferred shares, issued in 2018 and crediting an annual dividend of $ 5 per share. The company did NOT declare a dividend in 2018, 2019 and 2020. There are also convertible bonds in circulation issued in 2019 whose interest expense for 2020 was $ 60,000. The bonds are convertible into 15,000 common shares. As of December 31, 2020, no bonds had been converted. The net income for 2020 was $ 150,000 and the tax rate is 25%.

Determine basic and diluted earnings per share for the year 2020.

Answer 1

Particulars	Working	Basic EPS	Diluted EPS
		Amount $	Amount $
Net Income After Tax		150,000	150,000
Preferred Dividend	10000*5*3	(50,000)	-
After-tax cost of interest of Bonds	(+60000)*75%	-	45,000
Numerator		100,000	195,000
Number of common shares outstanding		25,000	25,000
Cumulative Preferred shares		-	10,000
Additional shares issued if bonds are converted		-	15,000
Denominator		25,000	50,000
EPS	Numerator/Denominator	4.00	3.90

Note : Cumulative Preference Dividend : Earlier year preference dividend has to be adjusted from earlier years profit. i.e it has been already adjusted in previous years.