Question

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 1,970,000

6% convertible, cumulative preferred stock, $100 par value; each share is convertible into 3 shares of common stock 4,200,000

Common stock, $10 par value 5,820,000

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 71,800 shares of common stock at $20 per share.

(a) Compute basic earnings per share for 2021. (Round answer to 2 decimal places, e.g. $2.55.) Basic earnings per share $1.65

(b) Compute diluted earnings per share for 2021. (Round answer to 2 decimal places, e.g. $2.55.) Diluted earnings per share

Answer 1

ANSWER

Net income = $1,210,000
Dividend on preference shares = 4,200,000*6%=	252,000
Number of common stock outstanding = 5,820,000/10=582,000
a Basic EPS = Net income-Preference Dividend/Common stock outstanding
=(1,210,000-252,000)/582,000= $1.65 (rounded off)
b.
Interest savings on Bonds net of tax = (1,970,000*7%)*(1-0.2)=		110,320
Potentially dilutive common shares for Bonds = 1,970,000/1000*30=		59,100
Potentially dilutive common shares for Stock option =(Market price-option price)/Market price * No. of options=
	=(25-20)/25*71,800 =	14,360
Diluted EPS = Net income-Preference Dividend+Interest savings on Bond net/(Common stock outstanding+Potentially Dilutive common shares)
	=(1,210,000-252,000+110,320)/(582,000+59,100+14,360)=		1.63	Rounded off
Preferred stock is not assumed to be converted since conversion would be antidilutive

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