Crystal Corporation earned net income of $750,000 in 2016. It has a complex capi

Question

Crystal Corporation earned net income of $750,000 in 2016. It has a complex capital structure as follows: 10,000 shares outstanding of 10%, $100 preferred stock, and 150,000 shares issued of $5 common stock. There is also 20,000 common stock in the treasury. The preferred stock can be converted into 25,000 shares of common. In addition Crystal has Bonds Payable of $250,000 that pay interest of 8% and can be converted into 10,000 shares of common stock. The applicable federal income tax rate is 40%.

Calculate basic earnings per share.

Calcuate diluted earnings per share.

Show steps on how numbers were reached.

Explanation / Answer

Basic EPS Net Income 750000 Less preferrred dividend (100000*100)*10% 100000 Net income available to equity shareholders 650000 number of shares outstanding 150000 Basic EPS (net income/number of shares outstanding) 4.333333333 Diluted EPS Net income 750000 Interest saving on convertible bonds (250000*8%)*(1-0.40) 12000 Net income revised 762000 Common shares outstanding 150000 Add: convertible preferred stock 25000 Add:convertible bonds 10000 Total share outstanding after conversion 185000 Diluted EPS ( revised net income/shares outstanding after conversion 4.118918919 (7620000/185000)

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