Question

The information below pertains to Sheffield Company for 2018.

Net income for the year		$1,230,000
7% convertible bonds issued at par ($1,000 per bond); each bond is convertible into     30 shares of common stock		1,990,000
7% convertible, cumulative preferred stock, $100 par value; each share is convertible      into 3 shares of common stock		4,110,000
Common stock, $10 par value		6,270,000
Tax rate for 2018		40%
Average market price of common stock		$25 per share

There were no changes during 2018 in the number of common shares, preferred shares, or convertible bonds outstanding. There is no treasury stock. The company also has common stock options (granted in a prior year) to purchase 68,200 shares of common stock at $20 per share.

(a) Compute basic earnings per share for 2018. (Round answer to 2 decimal places, e.g. $2.55.)

(b) Compute diluted earnings per share for 2018. (Round answer to 2 decimal places, e.g. $2.55.)

Answer 1

(a) Basic EPS 2018 = (Net income - Preferred dividend) / Weighted average no. of share outstanding

= ($1,230,000 - $287,700) / $627,000

= $1.50 per share

Where,

Preferred dividend = par value * Dividend rate

= $4,110,000 * 7%

= $287,700

Weighted average no. of share outstansing = $6,270,000 / $10 per share

= 627,000 shares

(b) Diluted EPS 2018 = (Net income before Preferred dividend + after tax cost of interest) / (Avarge outstanding share + Diluted share)

= ($1,230,000 + $83,580) / (627,000 shares + 251,200 shares)

= $1,313,580 / 878,200 shares

= $1.50 per share

Where,

After tax cost of interest = $1,990,000 * 7% * (1 - 0.40)

= $83,580

Diluted shares = Convertible bonds + Convertible preferred stock + Stock option

= ($1,990,000 / $1,000) * 30 shares + ($4,110,000 / $100) * 3 shares + 68,200

= 59,700 + 123,300 + 68,200

= 251,200 shares

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