Information from the financial statements of Henderson-Niles Industries included
ID: 2571860 • Letter: I
Question
Information from the financial statements of Henderson-Niles Industries included the following at December 31, 2016:
Henderson-Niles’ net income for the year ended December 31, 2016, is $920 million. The income tax rate is 40%. Henderson-Niles paid dividends of $3 per share on its preferred stock during 2016.
Compute basic and diluted earnings per share for the year ended December 31, 2016.
Information from the financial statements of Henderson-Niles Industries included the following at December 31, 2016:
Explanation / Answer
a. Basic EPS:
net income - preferred dividend / number of equity shares outstanding
here,
net income = $920million
preferred dividend = 65 millon shares * $3 per share
=>$195 million
number of common stock outstanding = 100 million
=>$920 million - $195 million / 100 million
=>$7.25. per share.
Diluted earnings per share
now,
for computing diluted earnings per share, we need to add back interest on bonds net off tax rate to the net income first
=> income for diluted earnings = net income + interest on bond (1 - tax rate)
here,
interst on bond = 10% * $2,600 million
=>$260 million.
now
net income for diluted earnings = $920 + $260*(1-0.40)
=>$1,076.million
the number of shares outstanding for diluted EPS
(note that conversions from bonds and preferred stock are always deemed to occur at the beginning of the period, which means that they will be given full time weightage)
=>100 million common stock + 30 million from preferred stock conversion + 21.5 million from bonds conversion
=>151.5 million.
diluted EPS = $1,076 million / 151.5 million
=>$7.10 per share.