Question

Splish Horizon Corp had the following items, all of which were outstanding throughout the entire fiscal year ending September 30, 2021:

●		870,000 common shares
●		300,000 $3 cumulative, no-par value preferred shares
●		Options to purchase 110,000 common shares at $13 per share. The average market price of Splish’s common shares during the year was $20 per share. None of the options were exercised or expired during fiscal 2021
●		9% bond with a face value of $1,900,000, convertible to 54,000 common shares.

Splish’s net income for fiscal 2021 was $6,685,500, and its tax rate was 15%. Preferred dividends had been paid in all previous fiscal years.

1.Calculate the income effect of the dividends on preferred shares.
2.Calculate Splish’s basic earnings per share for the year. Calculate Splish’s basic earnings per share for the year. (For simplicity, ignore the requirement to record the debt and equity portions of the convertible bond separately). (Round answer to 2 decimal places, e.g. 15.25.)

3.Calculate the after-tax interest paid on the 9% bonds.

4.Determine an incremental per share effect for 9% bonds. (Round earnings per share to 3 decimal places, e.g. 15.257.)

Potentially dilutive security		Incremental Numerator Effect		Incremental Denominator Effect		EPS
9% Bonds		$				$

5.Calculate the proceeds from assumed exercise of options.

Proceeds from exercise of options

$

Calculate the incremental shares oustanding upon the exercise of options.

The incremental shares oustanding upon the exercise of options

6.Rank the potentially dilutive securities from most dilutive to least dilutive.

9% bonds		Rank 1Rank 2Anti-dilutive
Options		Rank 1Rank 2Anti-dilutive

7.Calculate Splish’s diluted earnings per share for the year. (Round calculations of EPS to 3 decimal places, e.g. $3.545 and provide final answer to 2 decimal places, e.g. 15.25.)

		Numerator		Denominator		EPS
Basic EPS		$				$
9% bondsOptions
Sub Total						$
9% bondsOptions
Sub Total		$				$

Diluted EPS

Answer 1

1. Income effect of the dividends on preferred shares

Income available for equity shareholders before payment of dividend - income available for =  common shareholders after payment of dividend   

Number of outstanding common stocks

= (6,685,500 - 5,785,500) / 870,000

= $1.03

2. Basic Earnings per share

=   Earnings available for common stock holders / Total o/s shares during the year.

= 5,785,500 / 870,000

= $ 6.65

3. After tax interest on 9% Bonds

= Interest (1-tax rate)

= $171,000 (1-.15)

= $145,350

4. Incremental EPS - 9% Bonds

= after tax interest / equivalent number of common stocks

= $171,000 (1-.15) / 54,000

= $2.692

5. Proceeds from assumed exercise of option = $13 * 110,000

= $1,430,000

Incremental shares outstanding upon the exercise of option = 110,000

6.

Rank the potentially dilutive securities from most dilutive to least dilutive.
9% bonds		Rank 2
Options		Rank 1

7.  

		Numerator		Denominator		EPS
Basic EPS		$5,785,500		870,000		$6.65
Options		0		110,000
Sub Total		$5,785,500		980,000		$5.90
9% bonds		$145,350		54,000
Sub Total		$5,930,850		1034000		$5.74
Diluted EPS		$5.74