Walker Company has 15,000 shares of common stock outstanding during all of 2011.
ID: 2367827 • Letter: W
Question
Walker Company has 15,000 shares of common stock outstanding during all of 2011. It also has two convertible securities outstanding at the end of 2011. These are:Convertible preferred stock: 1,000 shares of 9%, $100 par, preferred stock were issued in 2010 for $140 per share. Each of the preferred stock is convertible into 3.5 shares of common stock. The current dividends have been paid. To date, no preferred stock has been converted.
Convertible bonds: Bonds with a face value of $100,000 and interest rate of 10% were issued at par on July 6, 2011. Each $1,000 bond is convertible inot 35 shares of common stock. To date, no bonds have been converted.
REQUIRED:
a. compute basic EPS
b. compute diluted EPS
Explanation / Answer
Basic EPS would be Net Income divided by basic shares outstanding. That is $54,000/15,000 = $3.60 This is Basic EPS. For Diluted we have to make two adjustments: adjust what Net Income would be without those diluted securities and then what diluted shares would be if you converted those instruments into common stock. Diluted Earnings = (net income – current preferred dividends) + convertible preferred dividend + (convertible debt interest * (1-t)) That is = (54000 - 0) + ($9 x 1000) + (10% x $100,000 x (1-0.30)) = $52,000 Diluted Shares Outstanding = weighted average shares + shares from conversion of convertible preferred shares + shares from conversion of convertible debt + shares issuable from stock options. that is = 15000 + (1000 x 3.5) + (100 x 35) + 0 = 22,000 Diluted EPS is = $52,000/22,000 = $2.3636 Hope this helps!
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.