During all 2015, Abel inc had 831,000 shares of common stock and 45,000 shares o
ID: 2578433 • Letter: D
Question
During all 2015, Abel inc had 831,000 shares of common stock and 45,000 shares of $80 par value, 7%, noncumulative, nonconvertible preferred stock issued and outstanding. Abel paid cash dividends of $550,000 to common shareholders, and also cash dividends of ??? to preferred shareholders, on dec 15, 2015.
Abel’s net income for the year ended dec 31, 2015, was $2,850,000. The income tax rate is 40%.
As part of an incentive compensation plan, Abel granted 22,000 incentive stock options to division managers at dec 31, 2013. Each option permits its holder to buy one share of common stock at an exercise price of $36 per share which can be exercise one year from that date. The market price of the common stock average $40 per share during 2015.
On july 12, 2013, Abel issued $800,000 of convertible 10%bonds at face value. Each $1,000 bond is convertible into 40 common shares.
A.Compute Abel’s basic earnings per share for the year ended dec 31, 2015.
B.Compute Abel’s fully diluted earnings per share for the year ended dec 31, 2015.
Explanation / Answer
Basic EPS = Earnings available to Equity Share holders/ No of Equity share holders
calculation of Earnings available to Eq share eholder
Net income = $28,50,000
Less Tax@40%=$11,40,500
Earnings After Tax=$17,10,000
Preference dividend= $2,52,000(45000*80*7%) consider dividend distribution tax Zero otherwise Net of dividend.
Earnings to Equity Shareholders=$14,58,000
EPS =1458000/831000=1.75
Diluted EPS:
= {1458000+Bonds interest (net of tax)}/ No of stock after convertion
= (1458000+80000*0.6)/ (831000+800*40)
=1.74
or
Weighted average number of shares
company issue share option to managers(right option)
theriotical Ex right factior= Current Market Price/ Right factors
Right factor= (fair value of the shares before right issue+sale proceeds from right issue)/Toal no stock
= (40 x 8310000+22000*36)/ (831000+22000)
=39.89
Theritical Ex right factor=40/39.89=1.0025
weighted average no of shares= 831000 x
B) Diluted EPS
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