Amy Dyken, controller at Bridgeport Pharmaceutical Industries, a
public company, is currently preparing the calculation for basic
and diluted earnings per share and the related disclosure for
Bridgeport’s financial statements. Below is selected financial
information for the fiscal year ended June 30, 2020.
Bridgeport Pharmaceutical Industries |
||
Long-term debt | ||
Notes payable, 10% |
$990,000 |
|
9% convertible bonds payable |
5,040,000 |
|
10% bonds payable |
6,080,000 |
|
Total long-term debt |
$12,110,000 |
|
Shareholders’ equity | ||
Preferred stock, 5% cumulative, $50 par value, 104,000 shares authorized, 26,000 shares issued and outstanding |
$1,300,000 |
|
Common stock, $1 par, 10,000,000 shares authorized, 1,000,000 shares issued and outstanding |
1,000,000 |
|
Additional paid-in capital |
3,990,000 |
|
Retained earnings |
6,090,000 |
|
Total shareholders’ equity |
$12,380,000 |
The following transactions have also occurred at
Bridgeport.
1. | Options were granted on July 1, 2019, to purchase 180,000 shares at $15 per share. Although no options were exercised during fiscal year 2020, the average price per common share during fiscal year 2020 was $20 per share. | |
2. | Each bond was issued at face value. The 9% convertible bonds will convert into common stock at 50 shares per $1,000 bond. The bonds are exercisable after 5 years and were issued in fiscal year 2019. | |
3. | The preferred stock was issued in 2019. | |
4. | There are no preferred dividends in arrears; however, preferred dividends were not declared in fiscal year 2020. | |
5. | The 1,000,000 shares of common stock were outstanding for the entire 2020 fiscal year. | |
6. | Net income for fiscal year 2020 was $1,490,000, and the average income tax rate is 20%. |
For the fiscal year ended June 30, 2020, calculate the following
for Bridgeport Pharmaceutical Industries. (Round
answers to 2 decimal places, e.g. $2.45.)
(a) Basic earnings per share.
Basic earnings per share |
$ |
(b) Diluted earnings per share.
Diluted earnings per share |
$ |
Part A
Basic earnings per share = (Net Income - Preferred Dividends)/ Weighted-Average Shares = (1490000-65000)/ 1000000 = $1.43
Preferred dividend = 26000 preferred shares * $50/share * 5% = $65000
Therefore,
Basic earnings per share: $1.43
Part B
Test for dilution:
Convertible Bonds:
Interest on convertible bonds (net of tax)/ Converted common shares = (5040000*9%*(1-20%))/((5040000/1000)*50) =221452/271782= 1.44
As 1.44 is greater than the 1.43 Basic EPS, the convertible bonds are antidilutive
Stock Options
As Average market price ($20) > option price ($15), the stock options are dilutive.
Incremental Shares = Market Price - Option Price/Market Price * Number of options or warrants = ((20-15)/20)*180000 = 45000 shares
Diluted earnings per share = Net Income - Preferred Dividends + Interest (net of tax)/ Average Common Shares + Potentially Dilutive Common Shares = (1490000-65000)/(1000000+45000) = $1.36
Therefore,
Diluted earnings per share: $1.36
Amy Dyken, controller at Bridgeport Pharmaceutical Industries, a public company, is currently preparing the calculation for...
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