Question

The information below pertains to Cheyenne Company for 2021. $1,140,000 2,010,000 Net income for the year 6% convertible bonds issued at par ($1,000 per bond); each bond is convertible into 30 shares of common stock 6% convertible, cumulative preferred stock, $100 par value; each share is convertible into 3 shares of common stock Common stock, $10 par value Tax rate for 2021 Average market price of common stock 3,820,000 5,820,000 20% $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 77,900 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 $ (b) Compute diluted earnings per share for 2021. (Round answer to 2 decimal places, e.g. $2.55.) Diluted earnings per share $

Answer 1

Basic Earning per share = Earning available to equity shareholder/ Weighted average of outstanding equity share

Earning available to equity share = 1,140,000/-

Weighted average outstanding shares = 582,000

Basic Earning per share = (1,140,000/582000) = 1.96

Diluted earning per share is basic earning per share after adjusting the impact of potential share. which can be calculated as under:-

Nominator Denominator Ratio

Basic Earning Per share 1,140,000 582,000 1.96

ESOP Nil 77,900

Total (After ESOP impact) 1,140,000 659,900 1.73

Convertible Bond 96,480 60,300   

(2,010,000*6%*(1-.20)) (2,010,000/1000*30)

Total (After Bond impact) 1,236,480 720,200 1.72

Convertible Preference Share 183,360 114,600

(3,820,000*6%*(1-.20)) (3,820,000/100)*3

Total(After Preference share impact 1,419,840 834,800 1.70

Hence diluted earning per share is 1.70