Vaughn Inc. had net income for the current year ending December 31, 2017 of $1,1

Question

Vaughn Inc. had net income for the current year ending December 31, 2017 of $1,192,700. During the entire year, there were 506,000 common shares outstanding. The company had two classes of preferred shares outstanding: the Class A preferred shares were $2.83 cumulative shares of which 12,000 were outstanding, and were convertible to common shares at a rate of 1:1. There were 104,000 $5.83 Class B non-cumulative preferred shares outstanding that were also convertible at a rate of 1:1. Vaughn had outstanding a $1,000,000, 8% bond issued in 2009 that was convertible to 22,000 common shares. The company also had outstanding a $1,000,000, 6% bond issued in 2010 that was convertible to 26,000 common shares. No dividends were declared or paid this year. Vaughn's tax rate is 38%. Calculate basic earnings per share. (For simplicity, ignore the requirement to record the debt and equity portions of the convertible bond separately.) (Round answer to 2 decimal places,e.g. 15.25.,) Basic earnings per share Calculate diluted earnings per share. (For simplicity, ignore the requirement to record the debt and equity portions of the convertible bond separately.) (Round calculations of EPS to 3 decimal places, e.g. $3.545 and provide final answer to 2 decimal places, e.g. 15.25.) Diluted earnings per share

Explanation / Answer

Calculation of Basic Earnings Per share Basic Earnings per share = Profit attributable to Common equity holders / Weighted average number of common shares outstanding Basic Earnings per share = $1192700 / 506000 shares = $2.36 per share Calculation of Diluted Earnings Per share Diluted Earnings per share = [Profit attributable to Common equity holders + After tax interest on bonds + Convertible preferred dividends] / [Weighted average number of common shares outstanding + All dilutive potential common stock] After tax interest on Bonds = [Interest on Bond issue 2009 + Interest on Bond Issue 2010] * (1 - tax rate) After tax interest on Bonds = [($1000000*8%) + ($1000000*6%)] * (1 - 0.38) = $86,800 Convertible preferred dividends = [$2.83 * 12000 shares] + [$5.83 * 104000 shares] = $640280 All dilutive potential common stock = 12000 shares + 104000 shares + 22000 shares + 26000 shares = 164000 shares Diluted Earnings per share = [$1192700 + $86800 + $640280] / [506000 shares + 164000 shares] = $1919780 / 670000 shares = $2.87 per share

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