1.Earnings Per Share Calculations (30 points) Curse of the Bambino Entertainment
ID: 2541891 • Letter: 1
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1.Earnings Per Share Calculations (30 points) Curse of the Bambino Entertainment CotBE) had the following securities outstanding and other information for 2017: Preferred Stock: Issue A Preferred Stock, cunnulative and nonconvertible, 5%, $100 par: $1,000,000 Dividend payments are in arrears for three (3) years. Issue B Preferred Stock, non-cumulative and convertible, 6%, $100 par $4,000,000 Conversion rate is 4 common shares for every preferred share Common Stock Class A Common Stock, $1 par, 5,000,000 shares authorized, 1,000,000 shares issued and outstanding at January 1,2017 $1,000,000 Repurchased 120,000 shares on March 1,2017 Repurchased 60,000 shares on July 1,2017 Sold 100,000 of repurchased (treasury) shares on September 1,2017 Stock Warrants warrants are exchangeable for 100,000 common shares. The warrants were issued on October 1,2016 and have a $15 exercise price per warrant. The average market price per share during 2017 was $20 Stock Options CotBE's issued 100,000 stock options to key executives on January 1, 2017 which vest on December 31,2019 and have an exercise price of $16 per option. Convertible Bonds-8% Convertible Bonds of $5,000,000 were sold at face value on July 1 2017. Each S1,000 of bond is convertible into 120 shares of common stock Other Information . Net Income for 2017 was $1,700,000 Income Tax Rate was 40% for 2017 CotBE's declared and paid a cash dividend of S200,000 on common stock during 2017 Required Calculate CotBE's Basic and Diluted EPS for the year ended December 31, 2017, show all calculations.Explanation / Answer
Net income = 1,700,000
Dividend on Issue A Preferred stock @5% for 3 years = 1,000,000 x 5% x 3 = 150,000
Dividend on Issue B Preferred stock @ 6% for 1 year = 4,000,000 x 6% = 240,000
Net income available to common stock holders = 1,700,000 - 150000 - 240000 = 1,310,000
Therefore EPS = Income available to common stock holders / Weighted avg number common shares = 1,310,000 / 903,333.33 = 1.45 / share
Weighted avg number of shares = 1,000,000 x 2/12 + 880,000 x 4/12 + 820,000 x 2/12 + 920,000 x 4/12 = 903,333.33
For diluted EPS, let us calculate the per share effect of each security:
Bonds: Each $1000 bond is convertible into 120 shares of common stock. i.e. 5,000,000 / 1000 x 120 = 600,000 potential shares
Also, as bonds are converted, the interest exp will also reduce
Int exp = 5,000,000 x 8% = 400,000
Income tax reduction due to less interest = 400,000 x 40% = 160,000
Net effect = 240,000
Outstanding shares for warrants = (Market price - warrant price) / Market price x No of warrants = (20 - 15)/20 x 100,000 = 25000 shares
Convertible Preference share = 4 common shares for every preferred share i.e. = 4,000,000 / 100 x 4= 160000 shares and preferred dividend = 240,000
Diluted EPS = (Earnings available to equity stock + Net Int savings on bonds + Convertible pref stock dividend) / (Weighted avg number of common stock + Number of common stock through bonds + Convertible equivalent preferred shares + equivalent warrants + Stock options)
= 1,310,000 + 240,000 + 240,000 / (903,333.33 + 600,000 + 160,000 + 25000 + 100,000) = 1.00
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