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Eastwind Corp. had $1,000,000 net income in 2015. On January 1, 2015 there were 200,000 shares...

Eastwind Corp. had $1,000,000 net income in 2015. On January 1, 2015 there were 200,000 shares of common stock outstanding. On April 1, 20,000 shares were issued and on September 1, Adcock bought 30,000 shares of treasury stock. On October 1, the company declared a two-for-one stock split. On December 1, 20% stock dividend was issued. There are 30,000 options to buy common stock at $40 a share outstanding. The market price of the common stock averaged $50 during 2015. The tax rate is 40%.

During 2015, there were 40,000 shares of convertible cumulative preferred stock outstanding. The preferred is $100 par, pays $3.50 per share a year dividend, and is convertible into one share of common stock.

Eastwind issued $2,000,000 of 8% convertible bonds at face value on July 1, 2015. Each $1,000 bond is convertible into 30 shares of common stock.

Instructions

Compute the basic and diluted earnings per share for 2015. Hand write work.

Solutions

Expert Solution

First step is adjustment of stock for stock dividend and stock split

Date

Particulars

Number of share

Adjustment for stock split

Adjustment for stock dividend

Adjusted number of share

01-Jan-15

Share at beginning

200000

1.2

480000

200000*2*1.2

01-Apr-15

Issued of share

20000

1.2

48000

20000*2*1.2

01-Sep-15

Treasury stock buy

30000

1.2

72000

30000*2*1.2

Weighted average number of share outstanding

Date

Particulars

Adjusted number of share

Number of month held out of 12 month

Weighted average

Remarks

01-Jan-15

Share at beginning

480000

12/12

480000

480000*12/12

01-Apr-15

Issued of share

48000

9/12

36000

48000*9/12

01-Sep-15

Treasury stock buy

72000

4/12

24000

72000*4/12

Weighted average number of share outstanding

540000

Net income

1000000

Less: dividend to preferred stock (40000*3.50)

140000

Earning available for common stock holders

860000

Weighted average number of share outstanding

540000

Basic EPS ( earning available for common stock holders / weighted average number of share outstanding)

$ 1.59

Now, we can calculate number of share for options for diluted EPS
Market value of options (30000*50)	1500000
Less: exercise value of option (30000*40)	1200000
Value of option	300000
Number of share for options for diluted EPS (300000/50)	6000

Number of share for convertible preferred stock for diluted EPS
Number of preferred stock	40000
Convertible ratio	1/1
*Number of share for convertible preferred stock for diluted EPS (400001/1)**	40000
preferred dividend added back to earning available for common stock holders for calculation of diluted EPS

Number of share for convertible bonds for diluted EPS
Number of bond (2000000/1000)	2000
Convertible ratio	30/1
Number of share for convertible bonds for diluted EPS (2000*30)	60000
Adjusted interest on bond added back to earning available for common stock holders for calculation of diluted EPS
Interest on bond (2000000*8%)	160000
Less: tax on interest (160000*40%)	64000
Adjusted interest on bond after tax	96000

	Earning	Number of share
Common stock	860000	540000
Options	0	6000
Convertible preferred stock	140000	40000
Convertible bond	96000	60000
Total	1096000	646000
Diluted EPS (1096000/646000)		$ 1.70

ekkarill92 answered 8 months ago

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