Question

COMPUTING DILUTED EARNINGS PER SHARE WITH MULTIPLE POTENTIAL COMMON SHARES Anderson Corporation $ Net income after tax and before conversion or exercise Weighted average common shares beginning of year before conversion or exercise 901,000 222,000 $ Total par value convertible bonds issued July 1 of current year Stated & market interest rate on bonds The total number of common shares that the bonds are convertible into Issued February 1 of the current year 3,000,000 3.00% 24,800 $ Total shares of cumulative preferred stock Par value per preferred share Dividend rate as a % par value The total number of common shares that the preferred stock is convertible into Outstanding as of the beginning of the year 80,000 5.00 4.0% 16,000 Total stock options available to be exercised Exercise price of warrants Market price of common shares Issued November 1 of the current year $ $ 50,000 80.00 100.00 Tax rate 21%

1.) Compute net income available to common stockholders.
2.) Compute basic earnings per share. Round to two decimal places.
3.) Compute the foregone interest expense AFTER TAX on the convertible bonds.
4.) Compute the per share effect of the convertible bonds. Round to two decimal places.
5.) Compute the foregone dividends on the convertible preferred stock.
6.) Compute the per share effect of the convertible preferred stock.
7.) Compute the incremental increase in the number of shares outstanding for the stock options.
8.) The convertible bonds should be ranked: A. First B. Second C. Third D. Not ranked; anti-dilutive
9.) The stock options should be ranked: A. First B. Second C.Third D.Not ranked; anti-dilutive
10.) Compute diluted earnings per share. Round to two decimal places.

Answer 1

1. ) Compute net income available to common stockholders.

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net income available to common stockholders. = Net income - Preferred dividend

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Net income = 907000

Preferred dividend = 80000 * 5 * 4% = 16000

net income available to common stockholders. = 907000 - 16000 = $891000

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2. ) Compute basic earnings per share

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Basic EPS = Net income available to common stockholders / WACSO

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WACSO = Weighted average common share = 222000

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Basic EPS = 891000 / 222000 = $4.14 per share

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3. ) Compute the foregone interest expense AFTER TAX on the convertible bonds.

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After tax interest = Before tax interest - Tax rate

Before tax interest = 300000*3% = 9000

Tax rate = 21%

After tax interest = 9000 - 21% = 7110

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4. ) Compute the per share effect of the convertible bonds.

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EPS effect = After tax interest / potential share

Numerator = 7710

Denominator = 24800

EPS effect = 7110 / 24800 = 0.287

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5.) Compute the foregone dividends on the convertible preferred stock.

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foregone dividends = 16000

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6.) Compute the per share effect of the convertible preferred stock.

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Numerator = 16000

Denominator = 16000

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per share effect of the convertible preferred stock = 16000 / 16000 = 1

.

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7.) Compute the incremental increase in the number of shares outstanding for the stock options.

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Proceeds from stock option = 50000 * 80= 4000000

Share can repurchase and reissue = 4000000 / 100 = 40000

Additional issue = 50000 - 40000 = 10000 share

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8.) The convertible bonds should be ranked: A. First B. Second C. Third D. Not ranked; anti-dilutive

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B . Second, Because

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9.) The stock options should be ranked: A. First B. Second C.Third D.Not ranked; anti-dilutive

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A. First

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10.) Compute diluted earnings per share. Round to two decimal places.

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	Numerator	Denominator	EPS
Basic EPS	891000	222000	$4.14 per share
option	0	10000
Sub total	891000	232000	$3.84 per share
Bond	7110	24800
Sub total	898110	256800	$3.497 per share
Preferred share	16000	160000
	914110	272800	$3.35 per share

Diluted EPS = $3.35 per share