Question

Problem 4 (15 points) n January 1, 2012, Raiders Company had 100,000 shares of common stock outstanding an 20,000 shares of 8%, $100 par, cumulative preferred stock outstanding. The preferred stocks are convertible to 100,000 shares of common stocks. Raiders reported net income of $500,000 The income tax rate is 40%. Also outstanding at January 1, 2012 were fully vested incentive k options giving key employees the option to buy 40,000 common shares at $25. The arket price of the common shares averaged $40 during 2012 Raiders also had 4,000,706 rtible bonds outstanding throughout 2012. Each $1,000 bond is convertible into 100 of common stock. None of the bonds had been converted by December 31, 2012 ar stock options were exercised during the year Required: Compute basic and diluted earnings per share for Raiders Company for 2012.

Answer 1

Raiders Company
Basic EPS	=	(Net Income after taxes-preferred Dividend)/weighted no. of shares outstanding
	=	=(500000-2000000*8%)/100000
	=	3.4
Diluted EPS	=	=620000/515000		(See working Notes below)
		1.203883495
		Net profit attributable attributable to common stockholders		No. of equity shares		Net profit attributable per shares
Net Income		340000	A	100000		3.4	Basic
Incentive stock Options		0	B	15000
	Total	340000	C=A+B	115000		2.95652174	Dilutive
Convertible Bonds		280000	D	400000
	Total	620000	E=C+D	515000		1.2038835	Dilutive
Preferred stock		160000	F	100000
	Total	780000	G=E+F	615000		1.26829268	Anti-Dilutive
Working Note : Order of preference for dilution
Incentive stock option
Increase in earnings					NIL
No. of incremental shares issued for no consideration					15000
(40000*(40-25)/40
EPS on increased share			NIL/15000)		NIL
Convertible Preference shares
Increase in earnings					160000
No. of incremental share					100000
EPS on increased share			=160000/100000		1.6
Convertible Bonds
Increase in earnings		=	Interest		168000	=4000000*7%*(1-0.4)
No. of incremental share					400000
EPS on increased share			=280000/400000		0.42
Note : as per above calculations, we can see that incentive options are most dilutive followed by convetible
bonds and convertible preference shares comes last in the order.
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