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Net income for the year $1,210,000 7% convertible bonds issued at par ($1,000 per bond); each bond is convertible into 30 shares of common stock 2,000,000 6% convertible, cumulative preferred stock, $100 par value; each share is convertible into 3 shares of common stock 4,080,000 Common stock, $10 par value 6,130,000 Tax rate for 2021 20% Average market price of common stock $25 per share There were no changes during 2021 in the number of common shares, preferred shares, or convertible bonds outstanding
| Net income for the year | $1,210,000 | |
|
7% convertible bonds issued at par ($1,000 per bond); each bond is convertible into |
2,000,000 |
|
|
6% convertible, cumulative preferred stock, $100 par value; each share is convertible |
4,080,000 |
|
|
Common stock, $10 par value |
6,130,000 |
|
|
Tax rate for 2021 |
20% |
|
|
Average market price of common stock |
$25 per share |
There were no changes during 2021 in the number of common shares, preferred shares, or convertible bonds outstanding. There is no treasury stock. The company also has common stock options (granted in a prior year) to purchase 74,200 shares of common stock at $20 per share.
(a) Compute basic earnings per share for 2021.
|
Basic earnings per share |
$1.57 |
(b) Compute diluted earnings per share for 2021.
|
Diluted earnings per share |
$ |
Expert Solution
| Computation of EPS | ||
| Basic EPS | 1.57 | |
| (net income-preference dividend/weighted no. of shares) | ||
| (1210000-244800)/613000 | ||
| Diluted EPS | 1.54 | |
| (Net income+Dilution effects/No. of shares+Dilutive shares) | ||
| (965200/627840) | ||
| Note: Preferred stock are Anti dilutive and Convertible bonds also, So these should be excluded from this computation of diluted EPS. |
Workings:
| Increase in Net income | Increase in Shares | Consider or not | |
| Stock Options | NIL | 14840 | Consider |
| Perefrence covertible stock | 244,800 | 122400 | Not consider |
| (4080000*6%) | (40800*3) | ||
| Convertible Bonds | 112,000 | 60,000 | Not consider |
| (20,00,000*7%*80%) | (2000*30) | ||
| Current Earning and Shares | 965,200 | 613000 | |
| Total | 965,200 | 627,840 |
| Effects of Options on Diluted EPS | |||
| Amount Paid= | Options Issued*EP Per Share | 1,484,000 | |
| (74200*20) | |||
| Value of Options in current shsres | Amount Paid/CMP | 59,360 | |
| (1484000/25) | |||
| Diluted Shares= | Options issued- Value of options in Current shares | ||
| (74200-59360) | 14,840 | Shares |
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