Question

PLEASE show your work as neatly as possible. Thanks

The Choco Inc. Corporation has the following information as of December 31, 20X0:

8% Preferred Stock $50 par 6250 shares outstanding....$312,500

Common Stock $2 par 250,000 shares outstanding (as of Jan 1).....$500,000

10% Bonds Payable   $200,000

Discount on Bonds Payable $16,000......$184,000

One share of preferred stock can be converted into 16 shares of common stock. Each $1,000 bond can be converted into 200 shares of common stock. The effective rate on the bonds is 12%. The effective tax rate is 30%. Common stock issued: 36,000 shares on 4/1, 2,000 shares on 7/1, and 12,000 shares on October 1.

Net profit for the year ended December 31, 20X0 is $544,750. Management holds 10,000 options to buy common stock at $6 per share. The market price of the common stock at December 31, 20X0 is $20 per share.

a) calculate basic earnings per share

b) calculate diluted earnings per share

Answer 1

Net income after tax	$         544,750
Less: dividend to preferred stock (312500*8%)	$            25,000
Net income available for common stock holders	$         519,750
Net income available for common stock holders	$         519,750
Divided by: weighted average share in common stock	281,000
Basic earnings per share	$            1.8496

Stock options
Market value of option exercisable (20*10000)	$         200,000
Less: exercisable value of option (6*10000)	$            60,000
Value of option	$         140,000
Number of share adjusted (140000/20)	7,000
Convertible bond
Interest expense (184000*12%)	$            22,080
Less: tax on interest (22080*30%)	$              6,624
Adjustment in income for convertible bond	$            15,456
Conversion ratio	200
Multiply by: Number of bond (200000/1000)	200
Number of share adjusted	40,000
Convertible preferred stock
Adjustment in income for convertible preferred stock = preferred divided	$            25,000
Conversion ratio	16
Multiply by: Number of preferred stock	6,250
Number of share adjusted	100,000

Instruments	Increase in earning	Increase in number of common shares	Earning per incremental share (Increase in earning / increase in number of common shares)
				Options	$                                     0	7,000	0.00
				Convertible bond	$                           15,456	40,000	0.39
Preferred stock	$                           25,000	100,000	0.25
The order in which to include dilutive instruments (lowest Earning per incremental share considered First.)
1	Options
2	Convertible preferred stock
3	convertible bond

Dilutive Earning per share
	Adjusted Net income	Potential common share	Per share (Adjusted Net income / potential common share)	Nature
					As per Basic Earning per share	$                        519,750	281,000	$                                              1.8496
					Add: options	$                                     0	7,000		Dilutive
	$                        519,750	288,000	$                                              1.8047
Add: Convertible Preferred stock	$                           25,000	100,000		Dilutive
	$                        544,750	388,000	$                                              1.4040
Add: Convertible bond	$                           15,456	60,000		Dilutive
	$                        560,206	448,000	$                                              1.2505
All instruments have earned per incremental share less than intermediate earnings per share. Therefore, all instruments are dilutive and used for the calculation of diluted EPS. Thus, Diluted Earnings per share is $1.2505.

Reported under financial statement
Basic earnings per share	$                           1.8496
Diluted Earnings per share	$                           1.4040