Homework Answers
| Basic earnings per share | $ 5.8182 |
| Diluted Earnings per share | $ 5.4920 |
Part A
| Date | Transaction | Number of adjusted share | Time Fraction | Weighted Average |
| Jan 1 | Beginning Balance | 170,000 | 12/12 | 170,000 |
| Apr 1 | Additional share issued | 30,000 | 9/12 | 22,500 |
| weighted average share in common stock | 192,500 |
| Net income after tax | $ 1,200,000 |
| Less: dividend to preferred stock (1000000*8%) | $ 80,000 |
| Net income available for common stock holders | $ 1,120,000 |
| Net income available for common stock holders | $ 1,120,000 |
| Divided by: weighted average share in common stock | 192,500 |
| Basic earnings per share | $ 5.8182 |
Part B
| Stock options | |
| Cash flow from the options excerised (20000*100) | $ 2,000,000 |
| Number of stock options outstanding | 20,000 |
| Less: Number of share purchased using average market price (2000000/125) | 16,000 |
| Number of common shares adjusted from the exercise of options | 4,000 |
| Convertible preferred stock | |
| Adjustment in income for convertible preferred stock = preferred divided | $ 80,000 |
| Number of share adjusted | 22,000 |
| 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 | 4,000 | 0.00 |
| Preferred stock | $ 80,000 | 22,000 | 3.64 |
|
The order in which to include dilutive instruments (lowest Earning per incremental share considered First.) |
|
| 1 | Options |
| 2 | Convertible preferred stock |
| 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 | $ 1,120,000 | 192,500 | $ 5.8182 | |
| Add: options | $ 0 | 4,000 | Dilutive | |
| $ 1,120,000 | 196,500 | $ 5.6997 | ||
| Add: Convertible Preferred stock | $ 80,000 | 22,000 | Dilutive | |
| $ 1,200,000 | 218,500 | $ 5.4920 | ||
| Diluted EPS | $ 5.4920 |
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