Problem 4: Earnings Per Share in a Complex Capital Structure McWade Company has

Question

Problem 4: Earnings Per Share in a Complex Capital Structure
McWade Company has 36,000 shares of common stock outstanding at the beginning of 2014. McWade issued 4,500 additional shares on May 1 and 3,000 additional shares on September 30. It also has two convertible securities outstanding at the end of 2014. These are:

a) Convertible preferred stock: 2,500 shares of 8.5%, $50 par, preferred stock were issued on January 2, 2011, 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.
b) Convertible bonds: Bonds with a face value of $500,000 and an interest rate of 7.5% were issued at par in 2012. Each $1,000 bond is convertible into 20 shares of common stock. To date, no bonds have been converted.

McWade earned net income of $145,000 during 2014. The income tax rate is 30%.

Required:

3. Calculate diluted earnings per share for 2013 and the incremental EPS of the preferred stock and convertible bonds.
4. Assume the same facts as above except that net income included a loss from discontinued operations of $27,000 net of income taxes. Compute basic EPS and show how it should be reported to shareholders. Do not calculated diluted EPS for this case.

Explanation / Answer

1) 36000 + 4500*8/12 + 3000*3/12 = 39750 shares 2) 145000/39750 = 3.6478 3) Diluted EPS = 145000/(39750+ 2500*3+10000)= 2.53 4)

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