2. John & Joe Inc. has the following balances in its equity accounts and transac

Question

2. John & Joe Inc. has the following balances in its equity accounts and transactions for 2016. - As of January 1, 2016, there are 10,000,000 shares of common stock authorized and 6,000,000 shares outstanding on January 1, 2016. - There are convertible bonds, $5,000,000 face value, 6% interest. - Options on 50,000 shares with a strike price of $80 and a current market price of $125. - Preferred stock, 5%, non-convertible, of $2,000,000 with no dividends in arrears. -

John & Joe Inc.’s net income was $14,400,000 and they paid $1,000,000 in dividends. During 2016, John & Joe had the following transactions: April 1 – Issued 2,000,000 shares of common stock for $125 per share. July 1 – Repurchased 1,000,000 shares of common stock at $100 per share. October 1 – Issued a 2-for-1 stock split.

Prepare the following calculations:

a. Weighted number of shares outstanding and the basic E.P.S.

b. Calculate diluted earnings per share.

Explanation / Answer

A) Earnings per share = Net Income - Preferred Dividends / Weighted Average outstanding common shares.

= 14,400,000 - 0 / 6,000,000

= 14,400,000/6,000,000

=2.4

B) Diluted Earnings per share = Net Income / Average Shares + Other convertiable instruments

= 14,400,000 / 10,000,000 + 5,000,000

= 14,400,000 / 15,000,000

= 0.96

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