On December 31, 2017, Merlin Company had outstanding 400,000 shares of common st

Question

On December 31, 2017, Merlin Company had outstanding 400,000 shares of common stock and 40,000 shares of 8% cumulative preferred stock (par $10). On February 28, 2018, Merlin issued an additional 36,000 shares of common stock. A 10% stock dividend was declared and distributed on July 1, 2018. On September 1, 2018, 9,000 shares were retired. At year-end, there were fully vested incentive stock options outstanding for 30,000 shares of common stock (adjusted for the stock dividend). The exercise price was $18. The market price of the common stock averaged $20 during the year. Also outstanding were $1,000,000 face amount of 10% convertible bonds issued in 2015 and convertible into 50,000 common shares (adjusted for the stock dividend). Net income was $900,000. The tax rate for the year was 40%.

Question: Compute basic and diluted EPS (rounded to 2 decimal places) for the year ended December 31, 2018.

Explanation / Answer

($ in 000s, except per share amount)

Basic EPS = ($900 - $32) / ( 400 * 1.10 + 36*(10/12)*1.10 - 9*(4/12) = $868/470 = $1.85

Diluted EPS = ($900 - $32 +$100 -40% *($100)) / (400*1.10 + 36*(10/12)*1.10 - 9*(4/12) + (30-27) + 50)

= $928 / 523 = $1.77

Shares reaquired for diluted EPS

(30,000 x $18)/ 20 = $540,000 / 20 = 27,000 shares

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