Question

Compute the diluted earnings per share for 2015.

D & H Inc. has 9,000,000 shares of $1 par value common stock outstanding at January 1. On April 1, D & H issued 1,000,000 shares at a cost of $26 per share. In addition, at December 31, 2015, 400,000 shares were issuable upon exercise of executive stock options which an exercise price of $20 per share. The average market price of the company’s stock was $30 per share.

Dun & Harvey Inc. also has two convertible securities.

Convertible bonds, $5,000,000 face value, 6% interest, convertible into 200,000 shares of common stock.

20,000 shares of $100 par value convertible preferred stock with a dividend rate of 5%. Each $100 par value share is convertible into 8 shares each.

During 2015, D & H’s net income was $20,700,000 and all preferred stock dividends were declared and paid.The company’s tax rate is 40%.

Answer 1

Net Income = 20,700,000

Earning attributable to common stock for purpose of Earning Per Share (EPS) = 20,700,000-100,000 (Preferred Dividend)=20,600,000

Calculation of Weighted Average no. of shares:

No. of Share	Outstanding for days	Weighted avg. share
9000000	365	90,00,000
1000000	275	7,53,425
		97,53,425

Basic EPS = 20600000 / 9753425 = 2.11

Statement for Calculating earning per incremental share:

	Increase in Earning (net of tax)	Increase in No. of Equity Shares	Earning per Incremental Share
Executive Stock Option	-	2,66,667	-
		(400000*20/30)
6% Convertible Bonds	180000	200000	0.9
5% Convertible Preferred Stock	1,00,000	160000	0.625

Executive Stock Option are most dilutive since their earning per incremental share is nil. Hence, for the purpose of computing diluted EPS Executive stock option will be considered first. 5% convertible preferred stock being second most dilutive will be considered next and thereafter 6% convertible bonds will be considered.

	Net Profit attributable to common stockholders	No. of Common Stocks	Net Profit attributable per share
As reported(A)	20600000	97,53,425	2.11
Executive Stock Option (B)	0	2,66,667
C=(A)+(B)	20600000	10020091.32	2.055869486
			(Dilutive)
5% Convertible Preferred Stock (D)	1,00,000	160000
E=C+D	2,07,00,000	1,01,80,091	2.03338058
			(Dilutive)
6% Convertible Bonds (F)	180000	200000
G=E+F	2,08,80,000	1,03,80,091	2.011542996
			(Dilutive)

Hence, the Diluted Earning Per Share for D&H Inc is $ 2.011