Question

Giovanni Corp. had $1,000,000 net income in 2021. On January 1, 2021 there were 200,000 shares of common stock outstanding. There are 30,000 options to buy common stock at $40 a share outstanding. The market price of the common stock averaged $50 during 2021. The tax rate is 30%.

During 2021, there were 40,000 shares of preferred stock outstanding. The preferred is $100 par, pays $3.50 a year dividend.

Giovanni issued $2,000,000 of 8% convertible bonds at face value during 2020. Each $1,000 bond is convertible into 30 shares of common stock.

Prepare the Basic and Diluted Earnings per Share for Giovanni Corp. for FY2021.

Answer 1

	Giovanni Corp
	Basic EPS Calculation:
a	Common stocks outstanding in 2021	200,000
	Earnings for Common StockHolders:
	Net Income in 2021	$     1,000,000
	Less : Preference Dividend for 40,000 Pref Shares @$3.5/Pref share=	$         140,000
b	Net Income available for Common Stock Holders in 2021=	$         860,000
c	Basic EPS=b/a=860000/200000=	$               4.30
	Diluted EPS
a	Common stocks outstanding in 2021	200,000
	Value of Convertible Bonds at Par	$     2,000,000
	No of Convertible Bonds with $1,000 par =	2,000
	Each Bond is convertible to 30 common stock
b	Potential Dilutive No of Common stock=2000*30=	60,000
	Stock Options outstanding	30,000
	Fair Value of Common Stock	$             50.00
	Option Offer price per stock =	$             40.00
	Proceeds from Option sale =30000*40=	$     1,200,000
	No of Common stock that can be prurchased as Fair value from Option Proceeds=1200000/50=	24,000
	So No of Common Stock to be issued without consideration=30000-24000=	6,000
c	Potentially dilutive common stock from option=	6,000
d	So No of Common Stock considered for Diluted EPS=a+b+c=	266,000
	Adjsutement of NP available to common stockholders for Diluted EPS
e	Net Income available for Common Stock Holders in 2021=	860,000	as derived before.
f	Add : Interest Expense on Bond @8% =$2M*8%=	160,000
g	Less : Tax on Interest @30%=160000*0.3=	48,000
h	Adjusted Net Profit for 2021 for diluted EPS =e+f-g=	972,000
i	Diluted EPS =h/d=972000/266000=	$               3.65