Question

Your employer just named you hot shot accountant of the year and assigned you the task of calculating their earnings per share for the year ended 12/31/18. On 1/1/18 400,000 shares of common stock were outstanding. Net income for 2018 was $1,500,000 and their tax rate was 40%. The average market value for each share was $25. On April 1 they issued 97,000 shares of common. On June 1 they acquired 37,500 share from the open market to use as treasury stock. On November 1 they sold 32,000 share of their treasury stock below their original cost.

Your company has 2 sets of options outstanding. Both sets were outstanding for the full year. The first set includes 2,000 options and each option can be exchanged for one share of common stock at an exercise price of 20$. The second set of options includes 1000 options and each option can be exchanged for one share of common stock at an exercise price 28$

On June 20, 2018 bonds were issued at par with face value of $2,000,000 and a 7% stated rate. Each bond has a $1,000 face value and is convertible into 30 share of common stock.

Your company also has 40,000 shares of 6% convertible, cumulative preferred stock ($100 par value per share) which was outstanding for the full year. Each Preferred share can be converted into 2 shares of common stock. No preferred dividends have been declared for the current year or the preceding 2 years.

What is Basic EPS and Diluted EPS?

Answer 1

Basic EPS = Net income after taxes attributable to Equity shareholders/ Weighted average number of Equity Stock

Calculation of Net Income attributable to Equity shareholders

Particulars	Amount ($)
Net Income before taxes	1,500,000
Less: Tax @ 40%	600,000
Net Income after taxes	900,000
Less: Dividend	-
Net Income attributable to Equity shareholders	900,000

Calculation of weighted average stocks

Particulars	No of stocks	No of month	Weighted average	Weighted average	Weighted average
Shares oustanding on 01.01.2018	400,000	12	400,000	400,000	400,000
Shares issued on 01.04.2018	97,000	9	72,750	72,750	54,563
Treasury shares purchased ans sold - to be ignored
Weighted Average Stocks			472,750	472,750	454,563

Basic Earning Per share =

1.90

Diluted EPS = Net income after taxes attributable to Potential Equity shareholders/ Weighted average number of Potential Equity Stock

Calculation of Net Income attributable to Potential Equity shareholders

Particulars	Amount ($)
Net Income before taxes	1,500,000
Add: Interest on Bonds	74,411
Net Income before interest and taxes	1,574,411
Less: Tax @ 40%	629,764
Net Income before interest but after taxes	944,647
Add: Dividend	-
Net Income attributable to Potential Equity shareholders	944,647

Calculation of weighted average Potential Equity stocks

Particulars	No of stocks	No of month	Weighted average	DEPS	Test of Dilution
Shares oustanding on 01.01.2018	400,000	12	400,000
Shares issued on 01.04.2018	97,000	9	72,750
Treasury shares purchased ans sold - to be ignored
7% Bonds issued on 20.06.2018	60,000	6.33	31,650	1.87	Passed
1- Options outstanding convertible into 1 common stock	2,000	12	2,000	1.87	Passed
2 - Options outstanding convertible into 1 common stock	1,000	12	1,000	1.86	Passed
Weighted Average Stocks			507,400

Diluted Earning Per share =

1.86