1-Basic and diluted EPS Net Income $2,100,000 Transactions in Common Shares Jan.
ID: 2542377 • Letter: 1
Question
1-Basic and diluted EPS Net Income $2,100,000 Transactions in Common Shares Jan. 1, 2018, Beginning number Mar. 1, 2018, Purchase of treasury shares June 1, 2018, Stock split 2-1 Nov. 1, 2018, Issuance of shares Change (60,000) 640,000 240,000 Cumulative 700,000 640,000 1,280,000 1,520,000 6% Cumulative Convertible Preferred Stock Sold at par, convertible into 200,000 shares of commorn adjusted for split). $1,000,000 Stock Options Exercisable at the option price of $25 per share. Average market price in 2018, $30 (market price and option price adjusted for split). 90,000 shares Instructions (a) Compute the basic earnings per share for 2018. (Round to the nearest penny.) (b) Compute the diluted earnings per share for 2018. (Round to the nearest penny.)Explanation / Answer
Solution a:
Weighted average outstanding shares (Considering split at begining) = (1400000*2/12) + (1280000*8/12) + (1520000*2/12) = 1340000 shares
Earning available for equity shareholders for 2018 = Net Income - Dividend to Preferred stock
= $2,100,000 - ($1,000,000 * 6%) = $2,040,000
Basic EPS = Earning for equity shareholders / Weighted average outstanding shares = $2,040,000 / 1340000 = $1.5224
Solution b:
Computation of Diluted EPS:
Amount to be paid for stock option = 90000*25 = $2,250,000
Value of option in current shares = Amount paid to exercise option / Current market price = $2,250,000 / 30 = 75000 shares
Diluted shares = Option issued - Value of option in current shares= 90000 - 75000 = 15000
Nos of shares to be issued for preferred stock = 200000 shares
Total weighted average outstanding shares in future = 1340000 + 15000 + 200000 = 1555000 shares
In future Net income available for equity shareholder will be increase by preferred dividend.
Preferred dividend = $60,000
Future available earnings for equity shareholders = $2,100,000
Diluted EPS = $2,100,000 / 1555000 = $1.3505 per share
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