Dunbar Company had 1,000,000 shares of $1 par value common stock outstanding at January 1, 2015....

Dunbar Company had 1,000,000 shares of $1 par value common stock outstanding at January 1, 2015. On July 1, 2015, the company issued 100,000 additional shares of common stock. In addition, at December 31, 2015, 90,000 shares were issuable upon exercise of executive stock options which require a $40 cash payment upon exercise. The average market price during 2015 was $50.

Dunbar Company also has two convertible securities. There are 10,000 convertible bonds with a face amount of $1,000, interest rate of 6% and convertible into 20 shares of common stock and 100,000 shares of 5%, $50 par value convertible preferred stock, convertible into 2 shares each.

During 2015, Dunbar Company’s net income was $24,000,000 and all preferred stock dividends were declared and paid. The company’s tax rate is 40%.

Instructions

Compute the diluted earnings per share for 2015.

Solutions

Expert Solution

Solution:

Weighted average shares for 2015 = (1000000*6/12) + (1100000*6/12) = 1050000 shares

Earning available for equity shareholders for 2015 = Net Income - Dividend to Preferred stock

= $24,000,000 - ($5,000,000 * 5%) = $23,750,000

Basic EPS = Earning for equity shareholders / Weighted average outstanding shares = $23,750,000 / 1050000 = $22.619

Computation of Diluted EPS:

Amount to be paid for stock option = 90000*40 = $3,600,000

Value of option in current shares = Amount paid to exercise option / Current market price = $3,600,000 / 50 = 72000 shares

Diluted shares = Option issued - Value of option in current shares= 90000 - 72000 = 18000

Nos of shares to be issued for convertible bonds = 10000*20 = 200000 shares

Nos of shares to be issued for preferred stock = 100000*2 = 200000 shares

Total weighted average outstanding shares in future = 1050000 + 18000 + 200000+200000 = 1468000 shares

In future Net income available for equity shareholder will be increase by Interest payment to bond holders net of tax and preferred dividend.

Interest on bond after tax = $10,000,000 * 6% (1-0.40) = $360,000

Preferred dividend = $250,000

Future available earnings for equity shareholders = $23,750,000 + $360,000 + $250,000 = $24,360,000

Diluted EPS = $24,360,000 / 1468000 = $16.594 per share

ekkarill92 answered 10 months ago

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