Question

On January 1, 2014, Green Company issued 15-year, $50,000,000 face value, 4% convertible preferred stock, at par. Each $1,000 preferred stock is convertible into 20 shares of Green’s common stock. None of the preferred stocks were converted in 2014. Green’s net income in 2014 was $8,680,000, and its tax rate was 30%. The company had 2,650,000 shares of common stock issued and outstanding throughout 2014. Compute diluted earnings per share for 2014.

Answer 1

Net Income for the year 2014 $8680000

Less tax @ 30%                       $2604000

After tax Net income               $6076000

Less Preference Dividend       $2000000

Net Income after Pref Div        $4076000

1.Calculation of the number of shares- It is based on the assumption that the preferred stocks were converted in 2014

Shares of Common Stock   2650000

Add Converted Preference Shares

$50000000/$1000*20 1000000       

Total Number of Shares =3650000

There fore diluted earnings per share in 2014 = $4076000/3650000

= $1.12

2.Calculation of the number of shares- It is based on the assumption that no preferred stocks were converted in 2014.

Total Number of shares -2650000

Therefore diluted earnings per share in 2014 =$4076000/2650000

                                                                       = $1.54