Francis company has 21,600 shares of common stock outstanding at the beginning o

Question

Francis company has 21,600 shares of common stock outstanding at the beginning of 2013. Francis issued 2,700 additional shares on May 1 and 1,800 additional shares on September 30. It also has two convertible securities outstanding at the end of 2013. these are:

1. Convertible preferred stock : 2,250 shares 0f 8.0%, $50 par preferred stock were issued on January 2, 2010, for $60 per share. Each share of preferred stock is convertible into 3 shares of common stock. current dividends have been declared and paid. To date, no preferred stock has been converted.

2. Convertible bonds : bonds with a face value of $ 225,000 and interest rate at 6.0% were issued at par in 2012. Each $1,000 bond is convertible into 25 shares of common stock. To date, no bonds have been converted.

Francis earned net income of $ 75,000 during 2013. The income tax rate is 30 %

Required :

1. Calculate basic EPS for 2013. If required, round your answer to the nearest cent.

2. calculate diluted EPS for 2013 and the incremental EPS of the preferred stock and convertible bonds. If required round your answer to the nearest cent

Diluted EPS=$------

Incremental EPS
Bonds=$------
preferred =$------

4a. Assume the same facts as above except that net income included a loss from discounted operations of $ 12,900 net of income taxes. compute basis EPS. You do not have to calculate diluted EPS for this case. If required round your answer to the nearest cent.

4b. show how the basic EPS you calculated should be reported to the shareholders. you do not have to calculate diluted EPS.

Explanation / Answer

YEAR 2013

Computation of weighted average number of shares:-

     = (21600 * 4/12) + (24300 * 5/12) + (26100 * 3/12)

= 23850 Shares

1. Basic EPS for year 2013 = Net income / number of shares

= 75000 / 23850

= 3.14 (approx)

The per share effect of each of convertible securities is as follows:-

Convertible preferred stock:-

   Per-share effect = Dividend / Incremental shares

Dividend = 2250 * 50 * 8% = $ 9000

Incremental shares = 2250 * 3 = 6750

Per- share effect = 9000 / 6750

= $ 1.33

Convertible Bonds:-

   Per- share effect = Interest (Net of tax) / Incremental shares

Interest (Net of Tax) = 225000 * 6 % * ( 1 - 0.30)

= 13500 (1 - 0.30)

= $ 9450

Incremental shares = 25 * 225000 / 1000

= 25 * 225

= 5625

Per-share effect = 9450 / 5625

= $ 1.68

Since the convertible preferred stock has lowest per share effect, hence is most dilutive and therfore, assumed to be converted before convertible bonds which have higher per-share effect. If only the preferred stock is assumed to be converted, The Diluted EPS is

   Diluted EPS = Net income + preferred dividend / Weighted average shares + incremental shares

   = 75000 + 9000 / 23850 + 6750

= 84000 / 30600

= $ 2.75 (approx)

Since the per share effect of convertible bond is $ 1.68, which is lower than the Diluted EPS of $ 2.75 assuming excercise of option. The Conversion of bond will reduce diluted EPS. Therefore, the bonds are diluted. The Diluted EPS will be:-

   Diluted EPS = Net income + Interest (net of tax) / Weighted average shares + Total incremental shares

   =75000 + 9450 / 23850 + 6750 + 5625

= 84450 / 36225

= $ 2.33 (approx)

Related Questions

Navigate

• Browse (All)
• Browse F
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.