Problem 16-8 The information below pertains to Marigold Company for 2018. Net in
ID: 2511288 • Letter: P
Question
Problem 16-8 The information below pertains to Marigold Company for 2018. Net income for the year 8% convertible bonds issued at par ($1,000 per bond); each bond is convertible into $1,170,000 30 shares of common stock 6% convertible, cumulative preferred stock, $100 par value; each share is convertible 2,060,000 3,990,000 ,290,000 40% $25 per share into 3 shares of common stock Common stock, $10 par value Tax rate for 2018 Average market price of common stock There were no changes durina 2018 in the number of common shares, preferred shares, or convertible bonds outstanding. There is no treasury stock. The company also has common stock options (granted in a prior year) to purchase 82,400 shares of common stock at $20 per share (a) Compute basic earnings per share for 2018. (Round answer to 2 decimal places, e.g. $2.55.) Basic earnings per share (b) Compute diluted earnings per share for 2018. (Round answer to 2 decimal places, e.g. $2.55.) Diluted earnings per share sExplanation / Answer
Requirement (a):
Basic earnings per share:
Particulars
Amount ($)
Net income for the year
1170000
Less: Preference dividend
(3990000 X 6%)
239400
Earnings available to common shareholders
930600
Number of common shares
(6290000/10)
629000
Basic Earnings per share
Earnings available to common shareholders
930600
Number of common shares
629000
Basic Earnings per share (930600/629000)
1.48
Requirement (b):
Particulars
Amount ($)
8% convertible bond
2060000
Par value of each bond
1000
Number of bonds (2060000/1000)
2060
Number of common stocks to be resulted from conversion of bond
Each convertible bond
30 comon shares
Number of bonds (2060000/1000)
2060
Number of common stock (2060 x 30)
61800
Increase in earnings
98880
Number of common stock
61800
EPS on the above
1.6
Not diluted hence, not to be considered
Preference dividend
(3990000 X 6%)
239400
Preference share value
3990000
Par value of each preference share
100
Number of preference shares (3990000/100)
39900
Number of common stock for each preference share
3
Total common stock to be issued (39900 x 3)
119700
EPS from above
Preference dividend
(3990000 X 6%)
239400
Total common stock to be issued (39900 x 3)
119700
EPS on the above (239400 /119700)
2
Again not diluted hence, not to be considered.
Thus, since both the conversion of preference stock into common stock as well as conversion of convertible bond will not dilute the earnings per share of the company thus, the basic earnings per share and the diluted earnings per share of the company will be same. Thus, the diluted earnings per share of the company will be $1.48, i.e. exactly same as that of basic earnings per share of the company as calculated in the first part of this problem.
Basic earnings per share:
Particulars
Amount ($)
Net income for the year
1170000
Less: Preference dividend
(3990000 X 6%)
239400
Earnings available to common shareholders
930600
Number of common shares
(6290000/10)
629000
Basic Earnings per share
Earnings available to common shareholders
930600
Number of common shares
629000
Basic Earnings per share (930600/629000)
1.48