Eastwind Corp. had $1,000,000 net income in 2015. On January 1, 2015 there were

Question

Eastwind Corp. had $1,000,000 net income in 2015. On January 1, 2015 there were 200,000 shares of common stock outstanding. On April 1, 20,000 shares were issued and on September 1, Adcock bought 30,000 shares of treasury stock. On October 1, the company declared a two-for-one stock split. On December 1, 20% stock dividend was issued. There are 30,000 options to buy common stock at $40 a share outstanding. The market price of the common stock averaged $50 during 2015. The tax rate is 40%.

During 2015, there were 40,000 shares of convertible cumulative preferred stock outstanding. The preferred is $100 par, pays $3.50 per share a year dividend, and is convertible into one share of common stock.

Eastwind issued $2,000,000 of 8% convertible bonds at face value on July 1, 2015. Each $1,000 bond is convertible into 30 shares of common stock.

Instructions

Compute the basic and diluted earnings per share for 2015. Hand write work.

Explanation / Answer

First step is adjustment of stock for stock dividend and stock split

Date

Particulars

Number of share

Adjustment for stock split

Adjustment for stock dividend

Adjusted number of share

01-Jan-15

Share at beginning

200000

2

1.2

480000

200000*2*1.2

01-Apr-15

Issued of share

20000

2

1.2

48000

20000*2*1.2

01-Sep-15

Treasury stock buy

30000

2

1.2

72000

30000*2*1.2

Weighted average number of share outstanding

Date

Particulars

Adjusted number of share

Number of month held out of 12 month

Weighted average

Remarks

01-Jan-15

Share at beginning

480000

12/12

480000

480000*12/12

01-Apr-15

Issued of share

48000

9/12

36000

48000*9/12

01-Sep-15

Treasury stock buy

72000

4/12

24000

72000*4/12

Weighted average number of share outstanding

540000

Net income

1000000

Less: dividend to preferred stock (40000*3.50)

140000

Earning available for common stock holders

860000

Weighted average number of share outstanding

540000

Basic EPS ( earning available for common stock holders / weighted average number of share outstanding)

$       1.59

Now, we can calculate number of share for options for diluted EPS

Market value of options (30000*50)

1500000

Less: exercise value of option (30000*40)

1200000

Value of option

300000

Number of share for options for diluted EPS (300000/50)

6000

Number of share for convertible preferred stock for diluted EPS

Number of preferred stock

40000

Convertible ratio

1/1

Number of share for convertible preferred stock for diluted EPS (40000*1/1)

40000

preferred dividend added back to earning available for common stock holders for calculation of diluted EPS

Number of share for convertible bonds for diluted EPS

Number of bond (2000000/1000)

2000

Convertible ratio

30/1

Number of share for convertible bonds for diluted EPS (2000*30)

60000

Adjusted interest on bond added back to earning available for common stock holders for calculation of diluted EPS

Interest on bond (2000000*8%)

160000

Less: tax on interest (160000*40%)

64000

Adjusted interest on bond after tax

96000

Earning

Number of share

Common stock

860000

540000

Options

0

6000

Convertible preferred stock

140000

40000

Convertible bond

96000

60000

Total

1096000

646000

Diluted EPS (1096000/646000)

$       1.70

First step is adjustment of stock for stock dividend and stock split

Date

Particulars

Number of share

Adjustment for stock split

Adjustment for stock dividend

Adjusted number of share

01-Jan-15

Share at beginning

200000

2

1.2

480000

200000*2*1.2

01-Apr-15

Issued of share

20000

2

1.2

48000

20000*2*1.2

01-Sep-15

Treasury stock buy

30000

2

1.2

72000

30000*2*1.2

Weighted average number of share outstanding

Date

Particulars

Adjusted number of share

Number of month held out of 12 month

Weighted average

Remarks

01-Jan-15

Share at beginning

480000

12/12

480000

480000*12/12

01-Apr-15

Issued of share

48000

9/12

36000

48000*9/12

01-Sep-15

Treasury stock buy

72000

4/12

24000

72000*4/12

Weighted average number of share outstanding

540000

Net income

1000000

Less: dividend to preferred stock (40000*3.50)

140000

Earning available for common stock holders

860000

Weighted average number of share outstanding

540000

Basic EPS ( earning available for common stock holders / weighted average number of share outstanding)

$       1.59

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