Question

EARNINGS PER SHARE EARNINGS PER SHARE WITH MULTIPLE POTENTIAL DILUTERS The following relate to Palmeto Corporation: Capital Stock: Common Stock, par $1, outstanding on 1/1/X1 90,000 shares Common Stock, issued 05/01/X1 6,000 shares Preferred Stock, par $20, percent (cumulative and nonconvertible) outstanding on 01/01/X1 2,500 shares Income data for year ending 12.31.X1: Income from Continuing Operations $134,000 Gain from Discontinued Operations (net of 40% tax) 10,000 Net Income 144.000 The following securities are outstanding for the entire year: 1. Stock rights that entitle stockholders to purchase 2,000 common shares for $20 per share. The average market price of the shares for the period is $25. 2. 1.000 shares of cumulative preferred, no par stock, with a $7 annual dividend per share. The stock is cumulative, and each share is convertible into 8 shares of common stock. 3. $200,000 of series A8% convertible bonds. Interest is payable annually. Each $1,000 bond is convertible into 30 shares of common stock. The bonds were issued at par. 4. $500,000 of series B 10% convertible bonds. Interest is payable annually. Each $1,000 bond is convertible into 50 shares of common stock. The bonds were issued at par. a. Calculate the basic EPS for X1. b. Calculated the diluted EPS for X1.

Answer 1

Reported under financial statement
Basic earnings per share	$                           1.4255
Diluted Earnings per share	$                           1.3422

Non-convertible preffered stock (2,500*$20=$50,000)($50,000*6%)	$              3,000
Convertible preffered stock (1000*$7)	$              7,000
Dividend to preferred stock	$            10,000
Beginning Capital stock (Jan to Dec = 12 months) (90000*12/12)	90,000
Additional stock issued (May to Dec = 8 months) (6000*8/12)	4,000
weighted average share common stock	94,000
Net income after tax	$         144,000
Less: dividend to preferred stock	$            10,000
Net income available for common stock holders	$         134,000
Net income available for common stock holders	$         134,000
Divided by: weighted average share common stock	94,000
Basic earnings per share	$            1.4255

Stock options
Market value of option exercisable (2000*25)	$            50,000
Less: exercisable value of option (2000*20)	$            40,000
Value of option	$            10,000
Number of share adjusted (10000/25)	400
Convertible bond - Series A
Interest paid to bond (200000*8%)	$            16,000
Less: tax on interest (16000*40%)	$              6,400
Adjustment in income for convertible bond	$              9,600
Conversion ratio	30
Multiply by: Number of bond (200000/1000)	200
Number of share adjusted	6,000
Convertible bond - Series B
Interest paid to bond (500000*10%)	$            50,000
Less: tax on interest (50000*40%)	$            20,000
Adjustment in income for convertible bond	$            30,000
Conversion ratio	50
Multiply by: Number of bond (500000/1000)	500
Number of share adjusted	25,000
Convertible preferred stock
Adjustment in income for convertible preferred stock (1000*$7)	$              7,000
Conversion ratio	8
Multiply by: Number of preferred stock	1,000
Number of share adjusted (Direct amount provided in question)	8,000

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	400	0.00
Convertible bond - Series A	$                             9,600	6,000	1.60
Convertible bond - Series B	$                           30,000	25,000	1.20
Convertible Preferred stock	$                             7,000	8,000	0.88
The order in which to include dilutive instruments (lowest Earning per incremental share considered First.)
1	Options
2	Convertible preferred stock
3	Convertible bond - Series B
4	Convertible bond - Series A

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	$                        134,000	94,000	$                                              1.4255
Add: options	$                                     0	400		Dilutive
Total	$                        134,000	94,400	$                                              1.4195
Add: Convertible Preferred stock	$                             7,000	8,000		Dilutive
Total	$                        141,000	102,400	$                                              1.3770
Convertible bond - Series B	$                           30,000	25,000		Dilutive
Total	$                        171,000	127,400	$                                              1.3422
Convertible bond - Series A	$                             9,600	6,000		Anti-Dilutive
	$                        180,600	133,400	$                                              1.3538
Dilutive Earning per share (Lowest amount from "Per share "Column)			$                                              1.3422
Diluted EPS after Convertible bond - Series A			$                                              1.3538
Diluted EPS after Convertible bond - Series B			$                                              1.3422
Earning per incremental share for Convertible bond - Series A is higher than Diluted EPS after Convertible bond - Series B. It is an anti-dilutive instrument. Not considered for calculation of Diluted Earnings per share. It means Diluted Earnings per share = $1.3422
Reported under financial statement
Basic earnings per share	$                           1.4255
Diluted Earnings per share	$                           1.3422