Francis Company has 12,000 shares of common stock outstanding at the beginning o

Question

Francis Company has 12,000 shares of common stock outstanding at the beginning of 2013. Francis issued 1,500 additional shares on May 1 and 1,000 additional shares on September 30. It also has two convertible securities outstanding at the end of 2013. These are:

Convertible preferred stock: 1,250 shares of 8.5%, $50 par, preferred stock were issued on January 2, 2010, for $55 per share. Each share of preferred stock is convertible into 3 shares of common stock. Current dividends have been declared and paid. To date, no preferred stock has been converted.

Convertible bonds: Bonds with a face value of $125,000 and an interest rate of 5.5% were issued at par in 2012. Each $1,000 bond is convertible into 20 shares of common stock. To date, no bonds have been converted.

Francis earned net income of $50,000 during 2013. The income tax rate is 30%

1) Calculate basic earnings per share for 2013. If required, round your answer to the nearest cent..

2). Calculate diluted earnings per share for 2013 and the incremental EPS of the preferred stock and convertible bonds. If required, round your answers to the nearest cent.

Diluted earnings per share: xxxxxx

3) Incremental Earning Per share   xxxxx

     a) Bonds      xxxxxx

     b) Preferred xxxxx

Explanation / Answer

Assumption: Francis earned net income of $50,000 during 2013 is net of Preffered dividend and bond interest, but before taxes.

Total common share outstanding at the end of 2013 = 14500 shares

1)The basic earnings per share for 2013 = $50,000 * 0.70 / 14500 = $2.41 per share

2) Diluted earnings per share for 2013 and the incremental EPS of the preferred stock and convertible bonds:

Convertible preferred stock conversion = 1250 * 3 = 3750 common shares. Now total dividend received $6337.50, previously total dividend paid = $5312.5, the incremental EPS for preferred stock is = $6337.5 - 5312.5 / 3750 = $0.27 per share

Convertible bonds conversion = 125000 /1000* 20 = 2500 common shares. Now total dividend received $4225,  previously total interest paid = $6875, the incremental EPS for bonds is = $4225 - 6875 / 2500 = (-)$1.06 per share

Total common shares on conversion = 14500 + 3750 + 2500 = 20750

Diluted earnings per share for 2013 =  $50,000 * 0.70 / 20750 = $1.69 per share

3) Incremental Earning Per share = $1.69 - $2.41 = (-) $0.72

     a) Bonds =   (-)$1.06 per share

     b) Preferred = $0.27 per share

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