ABC Corporation had 16 million shares of common stock outstanding during the cur
ID: 2581005 • Letter: A
Question
ABC Corporation had 16 million shares of common stock outstanding during the current calendar year. It issued 19,000, $1,000, convertible bonds on January 1. Each bond is convertible into 50 shares of common stock. The bonds were issued at face amount and pay interest quarterly at an annual rate of 10%. On June 30, ABC issued 190,000 shares of $100 par 6% cumulative preferred stock. Dividends are declared and paid semiannually. ABC has an effective tax rate of 40%. ABC would report the following EPS data (rounded to 2 decimal places) on its net income of $29 million:
Option b
Option a
Option c
Option d
ABC Corporation had 16 million shares of common stock outstanding during the current calendar year. It issued 19,000, $1,000, convertible bonds on January 1. Each bond is convertible into 50 shares of common stock. The bonds were issued at face amount and pay interest quarterly at an annual rate of 10%. On June 30, ABC issued 190,000 shares of $100 par 6% cumulative preferred stock. Dividends are declared and paid semiannually. ABC has an effective tax rate of 40%. ABC would report the following EPS data (rounded to 2 decimal places) on its net income of $29 million:
Explanation / Answer
Basic EPS = (Net Income - Preferred stock dividend) / Weighted Average Common Stock outstanding
..................= ($29,000,000 - $570,000) / 16,000,000
..................= $1.78
Diluted EPS = [(Net Income - Preferred stock dividend) + (Interest x 0.60)] / Weighted Average Common Stock outstanding
.....................= [($29,000,000 - $570,000) + ($1,900,000 x 0.60)] / (16,000,000 + (19,000 x 50))
.....................= $29,570,000 / 16,950,000
.....................= $1.74
Hence, the correct answer is Option B