I. Stan Corp. provides the following data for 20x1. Transactions in common stock
ID: 2474368 • Letter: I
Question
I. Stan Corp. provides the following data for 20x1.
Transactions in common stock:
1/1, beginning 300,000 shares
4/1, issuance100,000 shares
8% $100 par nonconvertible cumulative preferred stock $100,000
Issued at par
6% $100 par convertible cumulative preferred stock$200,000
Issued at $105
Convertible into 20,000 shares
Stock options60,000 shares
Option price$25
Average market price$35
Year-end market price$40
The net income for 20x1 is $2,300,000. The company’s tax rate is 30 percent. No conversion or options were exercised during 20x1.
Compute basic and diluted earnings per share.
Explanation / Answer
Basic Earnings per share can be calculated as
Net income is income after decution of Taxes, so we need not deduct tax again from Net income
Weighted average number of shares is calculated to give importance to time of issue .
Weighted average number of shares have been calculated as
Diluted Earnings per share can be calculated as
If convertible preferred stock took option of cmmon stock , they no longer be required to paid preferred dividend.
For Stock option . we need to calculate amount raised through stock option
= 60000 shares x option price
= 60000 x 25 , = 1500000
Now we need to calculate how many shares can be bought using above amount
Average market price = $35
No. of shares = Amount Raised / average market price
= 1500000 / 35 , = 42857 shares
Change in common stock = Shares issued - shares bought back
= 60000 - 42857 , = 17143
Now
Weighted average number of common stock shares = 375000
Add: Convertible stocks = 20000
Add: Stock option excess = 17143
Adjusted Weighted average number of common stock shares = 412143
Diluted EPS = Adjusted Earnings / Adjusted Weighted average number of common stock shares
= 2292000 / 412143 , = 5.56
Net Income ( After Income Tax) 2300000 Less: Dividend on preferred stock 1) Non Convertible Cumulative preferred stock 100000 x 8% 8000 2) Convertible cumulative Preferred stock 200000 x 6% 12000 Earnings available to common stockholders 2280000 Weighted average Number of common stock shares 375000 Basic earnings per share 6.08 = Earnings available / weighted average Number of shares