Assume that the following data relate to Rosen, Inc. for the year 2018: Net inco

Question

Assume that the following data relate to Rosen, Inc. for the year 2018:

Net income (30% tax rate) $3,800,000
Average common shares outstanding 2018 1,500,000 shares
10% cumulative convertible preferred stock:
Convertible into 80,000 shares of common $1,600,000
8% convertible bonds; convertible into 75,000
shares of common $2,500,000
Stock options:
Exercisable at the option price of $25 per share;
average market price in 2018, $30 84,000 shares

Instructions

Compute (a) basic earnings per share, and (b) diluted earnings per share.

Explanation / Answer

a) Basic earning per share = ( Net income-Preferred dividend)/Share outstanding

= (3800000-(1600000*10%)/1500000

Basic earning per share = 2.43 per share

b) Diluted earning per share = Adjusted net income/Adjusted diluted share

Adjusted net income = (3800000+2500000*8%*70%) = 3940000

Adjusted diluted share = 1500000+80000+75000+(84000-(84000*25/30) = 1669000

Diluted earning per share = 3940000/1669000 = 2.36 per share

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