At December 31, 2015 AJAX Company’s financial statements included the following:

Question

At December 31, 2015 AJAX Company’s financial statements included the following:

Net Income 2015:                    $305 million

Bonds Payable 8% convertible into 81 million shares of common stock     $500 million

        Common Stock:

                        Shares Outstanding January 1, 2015:    550 million

                        Treasury shares purchased for Cash October 1             36 million

The bonds payable were issued at par and AJAX’s tax rate is 40%

REQUIRED:    COMPUTE BASIC AND DILUTED EPS FOR 2015 ?

Explanation / Answer

Part A)

Basic EPS:

Basic EPS can be calculated with the use of following formula:

Basic EPS = (Net Income - Preferred Dividends (if any))/Weighted Average Number of Outstanding Shares

_________

The calculation of Weighted Average Number of Outstanding Shares is given below:

Weighted Average Number of Outstanding Shares = 550*12/12 - 36*3/12 (Treasury Shares) = 541 shares

Basic EPS = (305 - 0)/541 = $.56 per share

_________

Part A)

Diluted EPS:

Diluted EPS can be calculated with the use of following formula:

Diluted EPS = (Net Income + After-Tax Interest on Convertible Debt))/Weighted Average Number of Outstanding Shares as Calculated in Part A + Common Shares Issued Against Conversion)

_________

Using the information provided in the question and weighted average shares calculated in Part A), we get,

Diluted EPS = (305 + 500*8%*(1-40%))/(541 + 81) = $.53 per share

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