Question

Convertible Preferred Stock, Convertible Bonds, and EPS Francis Company has 12,000 shares of common stock outstanding at the beginning of 2016. Francis issued 1,500 additional shares on May 1 and 1,000 additional shares on September 30. It also has two convertible securities outstanding at the end of 2016. These are: Convertible preferred stock: 1,250 shares of 9.0%, $50 par, preferred stock were issued on January 2, 2013, for $60 per share. Each share of preferred stock is convertible into 3 shares of common stock. Current dividends have been declared and paid. To date, no preferred stock has been converted. Convertible bonds: Bonds with a face value of $125000 and an interest rate of 6.0% were issued at par in 2015. Each $1000 bond is convertible into 25 shares of common stock. To date, no bonds have been converted. Francis earned net income of $55000 during 2016. The income tax rate is 30%.

Required

3. Calculate diluted earnings per share for 2016 and the incremental EPS of the preferred stock and convertible bonds. If required, round your answers to two decimal places. Diluted earnings per share: $ _________ Incremental earnings per share Bonds: $ Preferred: $

4a. Assume the same facts as above except that net income included a loss from discontinued operations of $14700 net of income taxes. Compute basic EPS. You do not have to calculate diluted EPS for this case. If required, round your answer to two decimal places. Basic earning per share: $ ________

4b. Show how the basic EPS you calculated should be reported to shareholders. You do not have to calculate diluted EPS. Francis Company EPS Computations EPS Based on: $ $

Answer 1

	WN			Calculation of weighted no of shares diluted			Calculation of weighted no of shares Basic
3 a	Diluted EPS			WN
	Net Income	$55,000		No of Shares opening	12000		No of Shares opening	12000
Less	Preferred Dividends		Add	Issue shares on May 1			Issue shares on May 1
	1250 shares*9%*$50	($5,625)		1500*8/12	1000		1500*8/12	1000
Add	Bonds Interest Saved			Issue shares on Sep 30			Issue shares on Sep 30
	125000*6%*(1-30%)	$5,250		1000*3/12	250		1000*3/12	250
	Income available to stockholders -A	$54,625		Convertible preferred Stock			Weighted average no of shares-Basic	13250
	Weighted average no of shares-Diluted	20125		1250*3	3750
	Diluted EPS	$2.71		Convertible Bonds
				25*125000/1000	3125
				Weighted average no of shares Diluted	20125
b	Incremental EPS
	Net income	$55,000
Less	Preferred dividends	-
	1250*9%*50
	Income Available to shareholders	$55,000
	Weighted average no of shares O/S
	13250+3750	17000
	Incremental EPS to Preferred Stock	$3.24
	Net income	$55,000
Less	Preferred dividends	-
	1250*9%*50
Add	Bonds Interest Saved
	125000*6%*(1-30%)	$5,250
	Income available to stockholders	$60,250
	Weighted average no of shares	16375
	13250+3125
	Incremental EPS to convertible Bonds	$3.68
4 a	Loss from discontinued operations
	Net Income	$55,000
less	Preferred Dividend
	1250 shares*9%*$50	($5,625)
	Income available to stockholders	$49,375
	weighted average number of shares	13250
	O/S
	Basic Earnings Per Share	$3.73
b	Description	Amount-a	No of Shares-b	Earnings per share -a/b
	Income from continuing operations	$55,000	13250	$4.15
Less	Discontinuing operations net of tax	($14,700)	13250	($1.11)
	Net Income	$40,300	13250	$3.04