Question

Information from the financial statements of Henderson-Niles Industries included the following at December 31, 2018:

Common shares outstanding throughout the year		100	million
Convertible preferred shares (convertible into 40 million shares of common)		70	million
Convertible 10% bonds (convertible into 14.5 million shares of common)	$	1,100	million

Henderson-Niles’s net income for the year ended December 31, 2018, is $620 million. The income tax rate is 40%. Henderson-Niles paid dividends of $2 per share on its preferred stock during 2018.

Required:
Compute basic and diluted earnings per share for the year ended December 31, 2018. (Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)

Answer 1

BASIC EPS CALCULATION

The preferred dividend is   = 70 Million x $ 2/share

= 140 Million

Basic EPS      = ( Net income - preferred dividends ) / weighted average common shares

                        = ( $ 620 Million - $ 140 Million ) / 100

Basic EPS      = $ 4.80 / Share

DILUTED EPS CALCULATION

After-tax bond interest expense    =          $ 1100 x 10% = $ 110 Million

$ 110 Million x (100 - 40%) = $ 66 Million after-tax interest expense.

Shares assume converted to common

Common Shares       = 100 Million           

Preferred stock         = 40 Million

Convertible bonds   = 14.50 Million

TOTAL                       = 154.50 Million shares outstanding

Diluted EPS   = ( $ 620 Million - $ 140 Million + $ 66 Million + $ 66 Million ) / 154.50  

                        = $ 612 Million / 154.50 million shares

Diluted EPS = $ 3.96 / Share