Stockholders Equity and Earnings per Share STK-3) Assume that P & P Products had
ID: 2716999 • Letter: S
Question
Stockholders Equity and Earnings per Share
STK-3) Assume that P & P Products had net income of $91, 855 and had 92,623 shares of weighted-average common shares outstanding. They also had 5,000 shares of 8%, $100 par value, non-cumulative preferred stock outstanding.
STK-4) Refer to Problem STK-3 above. Assume that P & P Products also had 1,000 convertible bonds, par value of $1000, outstanding. The bonds pay 2% interest annually and mature in 2020. Furthermore, assume that each bond is convertible into 100 shares of $10 par value common stock. The market value of the stock is $12 per share. The marginal tax rate is 30%.
Required: Calculate diluted earnings per share.
Explanation / Answer
Diluted EPS = [(net income - preferred dividend) / weighted average number of shares outstanding - impact of convertible securities - impact of options, warrants and other dilutive securities]
Other form:
[(net income - preferred dividends) + convertible preferred dividend + (convertible debt interest * (1-t))] / [weighted average shares + shares from conversion of convertible preferred shares + shares from conversion of convertible debt + shares issuable from stock options.]
Here the net income = $91855
Shares outstanding = 92613
There are 2%, 1000 par value $1000 convertible bonds. They are converted to 100 stocks par value $10 having a total $ value as $1000. Therefore on convertibility firm can save interest of 2% x 1000 x $1000 = $20000
So the new net income would be = $91855 + $20000 = $111855
And new number of shares outstanding = 92613 + 100x1000 = 192613
Therefore diluted EPS = $111855 / 192613 = $0.5807