Question

Information concerning the capital structure of the Petrock Corporation is as follows: Common stock Convertible preferred stock 8%, $1,000 par, convertible bonds December 31 2016 2017 90,000 shares 90,000 shares 10,000 shares 10,000 shares $1,000,000 $1,000,000 During 2017, Petrock paid dividends of $1 per share on its common stock and $2.40 per share on its preferred stock. The preferred stock is convertible into 20,000 shares of common stock. The 8% convertible bonds are convertible into 30,000 shares of common stock. The net income for the year ending December 31, 2017, was $285,000, and the company's income tax rate was 40%. Required: 1. What was basic EPS for 2017? 2. What was diluted EPS for 2017? (For all requirements, round your answers for "Earnings per share" to 2 decimal places.) EPS for 2017 Basic Diluted Number of shares used in EPS computation Earnings used in EPS computation Earnings per share

Answer 1

2017
Basic EPS	Net income available to Equity share holders/Number of equity shares
Preference dividend	10000 shares @2.4 per share
Preference dividend	24000
Net income for the year	285000
Net income available to Equity share holders=	Net income after tax - Prefrence dividend
=	285000-24000
Net income available to Equity share holders=	261000
Basic EPS                                                               =	261000/90000
Basic EPS                                                               =	2.9
Diluted EPS	Net income Available after considering the effect of convertible bonds/No. of equity share holders after convertible bonds
No.of equity shares after Converting bonds into shares=	90000+30000
	120000
Net income after tax	2,85,000.00
Tax rate	40%
Net income before tax =	285000/60%
Net income before tax =	475000
Interest on bonds     =	100000*8%
Interest on bonds     =	8000
Net income before tax after considering bonds=	475000+8000
	483000
Net income after tax =	483000-40%(483000)
Net income after tax =	289800
Net income Available after considering the effect of convertible bonds=	289800-24000
Net income Available after considering the effect of convertible bonds=	265800
Diluted EPS                                                                                                          =	265800/120000
Diluted EPS                                                                                                           =	2.215
	2017
	Basic	Diluted
Number of shares used in EPS Computation	90000	120000
Earnings used in EPS Computation	261000	265800
Earnings per share	2.9	2.215