Assume that the following data relative to Kane Company for 2015 is available: N

Question

Assume that the following data relative to Kane Company for 2015 is available: Net Income $2,600,000 Transactions in Common Shares Change Cumulative Jan. 1, 2015, Beginning number 700,000 Mar. 1, 2015, Purchase of treasury shares (70,000) 630,000 June 1, 2015, Stock split 2-1 630,000 1,260,000 Nov. 1, 2015, Issuance of shares 240,000 1,500,000 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 2015, $30 (market price and option price adjusted for split). 90,000 shares Instructions (a) Compute the basic earnings per share for 2015. (Round to the nearest penny.) (b) Compute the diluted earnings per share for 2015. (Round to the nearest penny.)

Explanation / Answer

Calculation of Basic EPS Date Transactions Effective Date Weights (Months) Weighted Avg. no of Shares 01st Jan Opening Shares 01st Jan 2015 700000 01st Mar 2015 Purchase of Treasury Shares 01st Mar 2015 (630000*10/12) 525000 01st June 2015 Split Shares 01st June 2015 (630000*7 months/12) 367500 Total No of Shares 1592500 Basic EPS = Total Earnings Weighted Avg.no of Equity Shares = 2600000/1592500 = 1.63 Per Share Calculation of Diluted EPS At the time of Calculating diluted EPS , we calculate from most diluted to diluted shares Here most diluted is Options excerse. And Preferance shares Step -1 : Options Excersice Total Diluted Shares = Weighted Avg.no of Equity Shares + No of diluted shares = 1592500 + 90000 = 1682500 Shares Diluted EPS = 2600000/1682500 = 1.54 Shares Step -2 : Convertible Preferance Shares Total Savings in Dividends for 2 months from Nov' 01 2015 = 1500000*8/100*2/12 = $20,000 Total No of shares 200000 shares for 2 months 33333 shares Diluted EPS = (2600000-20000)/1592500+90000+33333 Diluted EPS = 1.5

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