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Peyton plans to raise $1,000,000 million of additional capital for the coming year
Peyton plans to raise $1,000,000 million of additional capital for the coming year. They anticipate that it will enable them to earn an additional $600,000 after tax. What would be the impact on earnings per share if the raise the $1,000,000 by:
issuing 10,000 share of 10% $100 par value convertible preferred stock, where shares can be coverted into 10 shares of Peyton common stock?
How do you calculate EPS?
Expert Solution
First we calculate Basic Earning per Share:
Earning per Share = (Net Income - Preferred Dividends)/Number of Common Shares Outstanding
= ($600,000-($1,000,000*10%))/100,000
= ($600,000-$100,000)/100,000
= $500,000/100,000
Earning per Share = $5
Note: Here We have assumed Number of Common Shares Outstanding are 100,000.
Earnings per Share if the raise the $1,000,000 by issuing 10,000 share of 10% $100 par value convertible preferred stock, where shares can be coverted into 10 shares of Peyton common stock:
Number of Existing Common Shares = 100,000
Additional Common Shares (10,000 preference shares*10 common shares) = 100,000
Total Common Shares after Conversion = 200,000
Earning per Share if Preferred Shares Converted (Diluted EPS) = $600,000/200,000 = $3 per share
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