During Year7, Stinger Corporation had 90,000 shares of common stock and 5,000 sh
ID: 2599238 • Letter: D
Question
During Year7, Stinger Corporation had 90,000 shares of common stock and 5,000 shares of preferred stock outstanding. The preferred stock has a par value of$50 per share and a 6% noncumulative dr dend rate. The preferred stock is onvertible to 2,000 shares of common stock. None was converted during Year . Stnger declared and paid cash dividends of $30,000 on common stock Stinger also paid the annual dividend on the preferred stock Stinger's net income for Year7 was $600,000 1. What is the annual dividend on the preferred stock (n total, not per share)? 2. What is the numerator for a basic EPS computation for Year7? 3. What is basic EPS for Year7? 4. Compute EPS as if the preferred stock was converted to common stock as of 1/1ear 5. What does Stinger report as diluted EPS for Year??Explanation / Answer
1.
Preferred stock dividend amount = Number of shares × Per share value × Dividend rate
= 5,000 × $50 × 6%
= $15,000 (Answer)
2.
Earning per share (EPS) is the ratio of total earnings of common shareholders to outstanding common shares. Therefore, the numerator would be total earnings of common shareholders.
Total earnings of common shareholders = Net income – Preferred dividend
= 600,000 – 15,000
= $585,000 (Answer)
3.
EPS = Total earnings of common shareholders / Outstanding common shares
= $585,000 / 90,000
= $6.50 (Answer)
4.
If preferred stock is converted,
Number of preferred stock = 5,000 – 2,000 = 3,000
Outstanding common shares = 90,000 + 2,000 = 92,000
Preferred dividend = Number of shares × Per share value × Dividend rate
= 3,000 × $50 × 6%
= $9,000
Total earnings of common shareholders = Net income – Preferred dividend
= 600,000 – 9,000
= $591,000
EPS = Total earnings of common shareholders / Outstanding common shares
= $591,000 / 92,000
= $6.42 (Answer)
5.
If the conversion is fully exercised, EPS would be lower. Such low EPS is known as diluted EPS, which is calculated at no 4.
Answer: Therefore, the diluted EPS is $6.42.
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