Sanchez, Inc. was a medium size company that owned and operated convenience stor

Question

Sanchez, Inc. was a medium size company that owned and operated convenience stores in south Texas. Their net income for the year was $10,000,000. They had outstanding 1 million common stock shares until September 30th when it issued another 500,000 shares (1,500,000 at year-end). They also had 50,000 preferred shares that paid a $4 annual dividend. The preferred stock was convertible into common stock at the rate of 2 common shares for each preferred share. a. Calculate the company's basic AND fully diluted earnings per share

Explanation / Answer

500000 shares were issued after 3 quarters in the year, so if we calculate weight so the number of shares that will be used in calculation of EPS = 500000/4 = 125000

Total number of common o/S shares = 1000000+125000 = 1125000 shares

Basic EPS = Net income – preferred dividend/ weighted number of o/s common share weighted

                  = 10000000 – (50000*4)/1125000

                  = 10000000 – 200000/1125000

                  = 9800000/1125000

                  = $8.71 per share

Basic EPS is 8.71

There are 50000 preferred stocks, when they are converted to common stock, there will be 2 common stocks for each preferred stock, and so there will be (50000*2 = 100000) more common o/s shares

One more thing that you should note that after the conversion there will be no preferred dividend will be paid

SO diluted EPS = Net income – preferred dividend/ weighted number of o/s common share weighted

                           = 10000000 – 0/ (1125000+100000)

                           = 10,000,000/1225000

                           = $8.16 per share

Diluted EPS is 8.16 per share

Pls share your feedback, if you have further query, pls let me know.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

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