Information from the financial statements of Henderson-Niles Industries included

Question

Information from the financial statements of Henderson-Niles Industries included the following at December 31, 2018:

Henderson-Niles’s net income for the year ended December 31, 2018, is $620 million. The income tax rate is 40%. Henderson-Niles paid dividends of $2 per share on its preferred stock during 2018.

Required:
Compute basic and diluted earnings per share for the year ended December 31, 2018. (Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)

Common shares outstanding throughout the year 100 million Convertible preferred shares (convertible into 40 million shares of common) 70 million Convertible 10% bonds (convertible into 14.5 million shares of common) $ 1,100 million

Explanation / Answer

BASIC EPS CALCULATION

The preferred dividend is   = 70 Million x $ 2/share

= 140 Million

Basic EPS      = ( Net income - preferred dividends ) / weighted average common shares

                        = ( $ 620 Million - $ 140 Million ) / 100

Basic EPS      = $ 4.80 / Share

DILUTED EPS CALCULATION

After-tax bond interest expense    =          $ 1100 x 10% = $ 110 Million

$ 110 Million x (100 - 40%) = $ 66 Million after-tax interest expense.

Shares assume converted to common

Common Shares       = 100 Million           

Preferred stock         = 40 Million

Convertible bonds   = 14.50 Million

TOTAL                       = 154.50 Million shares outstanding

Diluted EPS   = ( $ 620 Million - $ 140 Million + $ 66 Million + $ 66 Million ) / 154.50  

                        = $ 612 Million / 154.50 million shares

Diluted EPS = $ 3.96 / Share

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