On January 1, 2016, Burrito Industries had outstanding 880 million common shares
ID: 2453066 • Letter: O
Question
On January 1, 2016, Burrito Industries had outstanding 880 million common shares (par $1) that originally sold for $19 per share, and 8 million shares of 10% cumulative preferred stock (par $100), convertible into 80 million common shares.
On September 30, 2016, Burrito sold and issued an additional 32 million shares of common stock at $38. At December 31, 2016, there were common stock options outstanding, issued in 2015, and exercisable for 40 million 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 $1,300,000,000. The tax rate for the year was 40%.
Required:
Compute basic and diluted EPS for the year ended December 31, 2016.
Explanation / Answer
The formula for basic earnings per share is:
Profit or loss attributable to common equity holders of the parent business
Weighted average number of common shares outstanding during the period
Profit or loss attributable to common equity holders of the parent business
= net income after tax - preference dividend
= $1,300,000,000 * (1-0.40) - 10% * $100 * 8000000
= $780000000 - $80000000
= $ 700000000
Weighted average number of common shares outstanding during the period
Applying the formula we get,
Basic Earning per share = $ 700000000/888000000 = $0.79 (approximately)
Calculation of Diluted EPS
It may be noted from the above that options are most dilutive as their earnings per incremental share is nil. Hence, for the purpose of computation of diluted earnings per share, options will be considered first and thereafter convertible preference shares will be considered .
Since diluted earnings per share is increased when taking the convertible preference shares into account (from Rs. $0.77951 to $0.79755), the convertible preference shares are anti-dilutive and are ignored in the calculation of diluted earnings per share. Therefore, diluted earnings per share is $0.77951 or $0.78 (approximately).
date shares weighting (months) weighted average Jan-01 880000000 1.00 880000000 Sep-30 32000000 0.25 8000000 Total 888000000Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.