Karen Company had 105,000 shares of common stock outstanding on January 1, 2011.
ID: 2487718 • Letter: K
Question
Karen Company had 105,000 shares of common stock outstanding on January 1, 2011. On August 30, 2011, Karen sold 50,000 shares of common stock for cash. Karen also had 11,000 shares of convertible preferred stock outstanding throughout 2011. The preferred stock is $105 par, 5%, and is convertible into 4 shares of common for each share of preferred. Karen also had 400, 8%, convertible bonds outstanding throughout 2011. Each $1,000 bond is convertible into 35 shares of common stock. The bonds sold originally at par. Reported net income for 2011was $350,000 with a 35% tax rate. The regular common and preferred dividends were paid in 2011.
Explanation / Answer
After tax net income of 2011 = $350000 * (1 - 0.35) = $227500 - preferred dividend $57750 = $169750
Total number of common stock = Opening 105000 shares + new issued 50000 shares = 155000
EPS = $169750 / 155000 = $1.09 per share
Diluted EPS of the Company:
Total number of expected common stock = Opening 105000 + Proportionate newly issued (50000 * 4 months / 12) + Preferred stock conversion 44000 + bonds conversion 14000 = 105000 + 16667 + 44000 + 14000 = 179667 shares.
Diluted EPS = $169750 / 179667 = $0.94 per share
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