Adcock Corp. had $500,000 net income in 2007. On January 1, 2007 there were 200,

Question

Adcock Corp. had $500,000 net income in 2007. On January 1, 2007 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. There are 30,000 options to buy common stock at $40 a share outstanding. The market price of the common stock averaged $50 during 2007. The tax rate is 40%.

During 2007, there were 40,000 shares of convertible preferred stock outstanding. The preferred is $100 par, pays $3.50 a year dividend, and is convertible into three shares of common stock.

Adcock issued $2,000,000 of 8% convertible bonds at face value during 2006. Each $1,000 bond is convertible into 30 shares of common stock.

Instructions
Compute diluted earnings per share for 2007. Complete the schedule and show all computations.

Explanation / Answer

Net income $500,000 The incremental number of shares may be more simply computed: Number of shares = Market price - Option price/Market price x Number of options Number of shares = $50 - $40/$50 x30,000 Number of shares = 6,000 Convertible preferred stock 40,000 shares at par $100 = $4,000,000 Dividend = $4,000,000 x$3.50=$14,000,000 Dividend amount is convertible into three shares of common stock Basic EPS = Net income/No.of shares common stock outstanding Basic EPS = $500,000/200,000= $2.50 Net income $500,000 The incremental number of shares may be more simply computed: Number of shares = Market price - Option price/Market price x Number of options Number of shares = $50 - $40/$50 x30,000 Number of shares = 6,000 Convertible preferred stock 40,000 shares at par $100 = $4,000,000 Dividend = $4,000,000 x$3.50=$14,000,000 Dividend amount is convertible into three shares of common stock Basic EPS = Net income/No.of shares common stock outstanding Basic EPS = $500,000/200,000= $2.50

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