Question

Smith & Sons reported net income of $1,620,000. At year end, the company had the following securities outstanding:

300,000 shares of common stock selling at $30 per share
40,000 shares of convertible preferred stock, exchangeable for 60,000 shares of common stock

What is the company’s diluted earnings per share?

Answer 1

Solution:

The formula for calculating the Diluted Earnings per share is

= ( Net Income – Preferred dividend ) / ( No. of share of common stock + No. of shares of Dilutive common stock )

As per the information given in the question we have

Net Income = $ 1,620,000 ; Preferred dividend = Nil   ; No. of share of common stock = 300,000 ;

No. of shares of Dilutive common stock = 60,000 ;

Applying the above information in the formula we have

= ( $ 1,620,000 - $ 0 ) / ( 300,000 + 60,000 )

= $ 1,620,000 / 360,000

= $ 4.50

Thus the Diluted Earnings per share = $ 4.50