Question

Assume that the following data relative to Kane Company for 2015 is available: Net Income $2,800,000 Jan. 1, 2015, Beginning number of Common Shares 700,000 Transactions in Common Shares in 2015 On April 1, the corporation purchased on the market 60,000 of its own outstanding shares. On July 1, the corporation declared and issued a 2-for-1 stock split. On October 1, the corporation issued 240,000 new shares to raise additional capital. The following dilutive securities were issued prior to 2015. 10% Cumulative Convertible Preferred Stock Sold at par, convertible into 200,000 shares of common $1,000,000 Stock Options Exercisable at the option price of $20 per share. Average market price in 2015, $30 90,000 shares 9% Convertible Bonds Sold at par. Each $1,000 bond is convertible into 20 shares of common stock. $1,000,000 Tax rate is 40% in year 2015. Required: 1. Compute the weighted average shares outstanding during the year 2015. 2. Compute the basic earnings per share for 2015. (Round to the nearest penny.) 3. Compute the diluted earnings per share for 2015. (Round to the nearest penny.) You have to show the proper intermediate steps to get full credit.

Answer 1

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1			Change	Final	Period in month	Ratio (period/12)	Average number of outstanding shares (Final*Ratio)
Jan 1 2015	Beginning			700000	3	0.25	175000
April 1	Purchased		-60000	640000	3	0.25	160000
July 1	Split	2 for 1	640000	1280000	3	0.25	320000
Oct 1	New		240000	1520000	3	0.25	380000
					12		1035000
2
Basic Earning Per Share	(Net income-Preferred Dividend)/weighted average no of shares
Basic Earning Per Share	(2800000-100000)/1035000
Basic Earning Per Share	2.61
Preferred Dividend	1000000*10%=100000
3	Additional share for the purpose of Dilluted earning per share
	10% convertible preferred stock			200000
	Stock Option:
	Proced from exercise	90000*20	1800000
	Shares issued after exercise		90000
	Less: Treasury stock purchased with proceeds		60000
	(1800000/30 market price)
	Additional Share on stock option	90000-60000		30000
	9% Convertible Bond	1000000/1000*20		20000
	Total Additional shares for Dilluted EPS			250000
	Dilluted EPS:
	Net After tax income		2800000
	Add: back interest on bond	1000000*9%	90000
	Less: Income Tax 40%	90000*40%	36000
	Net income for Dilluted EPS		2854000
	Diluted EPS	2854000/(1035000+250000 additional share)
	Diluted EPS	2.22