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.

1) 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.

2) There are convertible bonds, $5,000,000 face value, 6% interest.

3) Options on 50,000 shares with a strike price of $80 and a current market price of $125.

4) Preferred stock, 5%, non-convertible, of $2,000,000 with no dividends in arrears.

5) 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. Calcualtion of weighted number of shares is as under: No. of shares Cumulative no. of shares Restated Months outstanding Weighted Average No. of shares 1/1/2016 common stock outstanding 6,000,000 6,000,000 2 3           3,000,000 1/4/2016 issued common stock 2,000,000 8,000,000 2 3           4,000,000 1/7/2016 shares repurchased -1,000,000 7,000,000 2 3           3,500,000 1/10/2016 stock split 2for 1 7,000,000 14,000,000 3           3,500,000 Total average number of shares        14,000,000 cumulative number of shares are restated with the fraction of stock split for calculation of weighted averge number of shares. The Basic earning per share=Net Income after preference dividends/Weighted number of shares outstanding Net Income after preference dividends= $14,400,000- ($2,000,000*5%)                                                                                  '= $14,400,000-$100,000                                                                                  '=$14,300,000 Basic Earnings per share=$14,300,000/14,000,000                                                 '=$1.021 b. The calculation of diluted earning per share: Basic earning per share=$1.021 Diluted per share if bonds are converted then net income will increase by interest on bond Net income =$14,300,000+($5,000,000*6%)                         '=$14,600,000 Average number of shares=(14,000,000+50,000)=14,050,000 ($5,000,000/$100 per share)=50,000 common stock The diluted earning per share if bonds are converted into common stock Diluted EPS= Net income before interest and preference dividend/weighted average no. of shares+converted shares                         =$14,600,000/14,050,000                        '=$1.04 The diluted earning per share if option is excercised= No. of shares issued if option is exercised=(Market price-Option price)/Market price*No. of stock option                                                                                      '=($125-$80)/$125*50,000 shares                                                                                      '=18,000 shares Net income will change with the option exercise therefore it remains same as $14,300,000. Diluted Earning per share=$14,300,000/(14,000,000+18,000)                                                     '=$1.02 per share If John and joe converts preference shares and exercise stock option plan then the diluted earning per share would be as under: Diluted earning per share=($14,300,000+$300,000)/((14,000,000+50,000+18,000)                                                     =$14,600,000/14,068,000                                                     '=$1.04

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