On January 1, 2010, Lindsey Company issued 10-year, $3,100,000 face value, 6% bo

Question

On January 1, 2010, Lindsey Company issued 10-year, $3,100,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 19 shares of Lindsey common stock. Lindsey's net income in 2011 was $300,000, and its tax rate was 40%. The company had 100,000 shares of common stock outstanding throughout 2010. None of the bonds were converted in 2010. (Round answers to 2 decimal places, e.g. 5.75.)





Compute diluted earnings per share for 2010.

$






Compute diluted earnings per share for 2010 using the same facts as those assumed for part (a), except that $1,700,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred share is convertible into 8 shares of Lindsey common stock.

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Explanation / Answer

EPS = (Net Income - Prefered Stock dividend)/Weighted avge of Commn stck shares outstanding There are two forms of EPS reported: Basic: in this case "weighted average of shares outstanding" includes only actual stocks outstanding. Diluted: in this case "weighted average of shares outstanding" is calculated as if all stock options, warrants, convertible bonds, and other securities that could be transformed into shares are transformed. This increases the number of shares and so EPS decreases. Diluted EPS is considered to be a more reliable way to measure EPS. Net income is the residual income of a firm after adding total revenue and gains and subtracting all expenses and losses for the reporting period. Net income can be distributed among holders of common stock as a dividend or held by the firm as an addition to retained earnings. The items deducted will typically include tax expense, financing expense (interest expense), and minority interest. Likewise, preferred stock dividends will be subtracted too, though they are not an expense. Net sales revenue – Cost of goods sold = Gross profit – SG&A expenses (combined costs of operating the company) = EBITDA – Depreciation & amortization = EBIT – Interest expense (cost of borrowing money) = EBT – Tax expense = Net income (EAT) a. From above, we know that Net Income is $300,000 & No of Common stock shares outstanding is 100,000. No of Bonds issued = Total Debt/FV of Bond = $3100,000/$1,000 = 3100 bonds Each bond is covertible into 19 shares. So Total no of new shares = No of Bonds* Shares per bond = 3100*19 = 58,900 shares. So weighted average of shares outstanding = 100,000+58,900 = 158,900 So Diluted EPS = $300,000/158,900 = $1.89 per share b. Bonds issued = Total Debt - Conv Pref stock = $3100,000-$1700,000 = $1400,000 No of Pef shares = $1700,000/$100 = 17000 Pref shares No of shares = No of Pref shares*Shares per pref share = 17000*8 = 136,000 No of Bonds = $1400,000/$1000 = 1400 Each bond is covertible into 19 shares. So Total no of new shares = No of Bonds* Shares per bond = 1400*19 = 26,600 shares. So weighted average of shares outstanding = Common shares + Shares coming out of Pref Shares conversion + shares coming from Bond conversion = 100,000+136,000+26,600 = 262,600 So Diluted EPS = $300,000/262600 = $1.14 per share

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