Requirement 1
Numerator (Basic EPS):
Net income = $750 million
Preferred dividends= 5mn * 9% * $ 100 = $ 45 million
since the preferred stock is cumulative, the dividend is deducted whether or not paid)
Denominator (Basic EPS): Weighted average Number of shares
common stock outstanding (1/1 – 12/31) |
480 million x (12/12) *1.05 |
504 million |
Treasury shares purchased (3/1 – 12/31) |
(24) million x (10/12) *1.05 |
(21) million |
Treasury shares sold (10/1 – 12/31) |
(4) million x (3/12) |
1 |
The weighted average number of shares |
484 million |
Basic EPS = ($750-45) ÷ 484 = $1.46
Now,
Stock Options
The stock options are dilutive because exercise price is lower than market price of $ 70 per share.
Using treasury stock method.
Convertible Bonds
Using method if bonds are converted into common stock. Here is the step by step approach to calculate nature of dilution.
shares issued on conversion = 6 million
Interest not paid, net of tax = $3 [(8% x $62.5) x 60%]
Interest per shares issued = 3/6 = $ 0.5 per share
EPS without assumed conversion = ($750 - $45+3) ÷ (484 + 6+6) = $1.43
The convertible bonds are dilutive because $1.43 is less than $1.46
Hence, diluted EPS = (750-45+3)/(484+6+6) = 708/496 = 1.43
Basic EPS =705/484 = 1.46
Diluted EPS = 708/496 = 1.43
Kindly upvote
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