1. Basic and diluted EPS. Assume that the following data relative to Kane Compan
ID: 2388514 • Letter: 1
Question
1. Basic and diluted EPS.Assume that the following data relative to Kane Company for 2010 is available:
Net Income $2,100,000
Transactions in Common Shares Change Cumulative
Jan. 1, 2010, Beginning number 700,000
Mar. 1, 2010, Purchase of treasury shares (60,000) 640,000
June 1, 2010, Stock split 2-1 640,000 1,280,000
Nov. 1, 2010, Issuance of shares 120,000 1,400,000
8% Cumulative Convertible Preferred Stock
Sold at par, convertible into 200,000 shares of common
(adjusted for split). $1,000,000
Stock Options
Exercisable at the option price of $25 per share. Average
market price in 2010, $30 (market price and option price
adjusted for split). 60,000 shares
Instructions
(a) Compute the basic earnings per share for 2010. (Round to the nearest penny.)
(b) Compute the diluted earnings per share for 2010. (Round to the nearest penny.)
Explanation / Answer
60,000 * $25 = $1,500,000
$1,500,000 / $30 = 50,000 shares purchased;
60,000 exercised – 50,000 in treasury = net 10,000 shares impact on denominator. I
ndex = $0
Convertible Pfd = 80,000 / 200,000 = $0.40 index
Convertible Bonds = $2,000,000x 8% x (1 – 60%) = 96,000
=96,000 /120,000 shares = $0.80 index
Basic earnings per share:=
=($2,100,000 – $80,000) /1,300,000=$1.55
Diluted earnings per share=
= (2,100,000 +96,0000)/ (1,300,000 + 10,000 + 200,000 +120,000)= $1.35
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