On January 1, 2013, Belk, Inc. had outstanding 440,000 common shares (par $1) th

Question

On January 1, 2013, Belk, Inc. had outstanding 440,000 common shares (par $1) that originally sold for $20 per share, and 4,000 shares of 10% cumulative preferred stock (par $100), convertible into 40,000 common shares.

On October 1, 2013, Belk issued an additional 16,000 shares of common stock at $33. At December 31, 2013, there were common stock options outstanding, issued in 2012, and exercisable for 20,000 shares of common stock at an exercise price of $30. The market price of the common stock at year-end was $48. During the year the price of the common shares had averaged $40.

Net Income was $650,000. The tax rate for the year was 40%.

Compute basic and diluted EPS for the year ended December 31, 2013.

Explanation / Answer

Answer:

Numerator (Basic EPS): Net income = $650,000; Preferred dividends = $40,000 [(10% x $100) x 4,000].

Because the preferred stock is cumulative, dividends are included whether or not paid.

Denominator (Basic EPS): Weighted average no of shares common stock

outstanding

1/1 – 12/31    440,000 x (12/12) = 440,000

10/1 – 12/31            16,000 x (3/12)    = 4,000

Weighted average no of shares           =444,000

Basic EPS = ($650,000 - $40,000) ÷ 444,000 = $1.37

Diluted EPS=(650000-40000+44000)/(444000+5000+40000)

=$1.33

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