Question

FINANCIAL ACCOUNTING II For the entire year ended December 31, 2017, The Martin Corporation had 40,000 shares of preferred stock issued and outstanding, the stock has a stated value of $10 per share and has long traded on the open market at $16 per share. The preferred shares are non-cumulative and non-participating, and the dividend rate is 3%. As of the year-end, the company's board of directors has not declared any dividends for the year. The company also has common stock: there are 100,000 shares authorized, at $2 par value. On January 1, 2017, there were 6,000 shares of common stock issued and outstanding, and, on September 1, 2017, the company issued another 3,000 shares in exchange for cash and equipment. Assuming that The Martin Corporation's net income for 2017 was $145,000 and that there were stock warrants outstanding since July 1, 2017, which, if converted (when they are eligible for conversion in 2020), would provide another 5,000 shares of common stock, what earnings per share would the company disclose for the year?

Answer 1

Earnings per Share for the year ended 31^st December 2017

EPS = (Net Income – Preferred Dividend) / No. of Outstanding Shares

       = ($ 145,000 - $ 12,000) / (6000 + 3000)

= $ 14.77 per share

Note - Preferred Dividend = (40,000 shares $\times$ $ 10) $\times$ 3% = $ 12,000

Earnings per Share for the year ended 31^st December 2020 (when stock warrants are converted into common stock)

Assuming Net Income and preferred dividend constant

= ($ 145,000 - $ 12,000) / (6000 + 3000 + 5000)

= $ 9.5 per share

The above-calculated EPS for 2020 is also the Diluted EPS for the year ended 31st December 2017. Diluted EPS includes the effect or impact of potential securities convertible into common shares. 5000 shares included for warrants that are convertible into common stock.