Convertible Preferred Stock, Convertible Bonds, and EPS Francis Company has 9,60
ID: 2730773 • Letter: C
Question
Convertible Preferred Stock, Convertible Bonds, and EPS
Francis Company has 9,600 shares of common stock outstanding at the beginning of 2013. Francis issued 1,200 additional shares on May 1 and 800 additional shares on September 30. It also has two convertible securities outstanding at the end of 2013. These are:
Convertible preferred stock: 1,000 shares of 9.5%, $50 par, preferred stock were issued on January 2, 2010, for $55 per share. Each share of preferred stock is convertible into 2 shares of common stock. Current dividends have been declared and paid. To date, no preferred stock has been converted.
Convertible bonds: Bonds with a face value of $100,000 and an interest rate of 6.5% were issued at par in 2012. Each $1,000 bond is convertible into 25 shares of common stock. To date, no bonds have been converted.
Francis earned net income of $50,000 during 2013. The income tax rate is 30%.
Required:
1. Compute the number of shares of common stock that Francis should use in calculating basic earnings per share for 2013.
Weighted average shares outstanding: ____ shares
2. Calculate basic earnings per share for 2013. If required, round your answer to the nearest cent.
Basic earnings per share: $ ____
3. Calculate diluted earnings per share for 2013 and the incremental EPS of the preferred stock and convertible bonds. If required, round your answers to the nearest cent.
Diluted earnings per share: $ ___
$ ___
4a. Assume the same facts as above except that net income included a loss from discontinued operations of $12,000 net of income taxes. Compute basic EPS. You do not have to calculate diluted EPS for this case. If required, round your answer to the nearest cent.
Basic earning per share: $ _____
4b. Show how the basic EPS you calculated should be reported to shareholders. You do not have to calculate diluted EPS.
Francis Company
EPS Computations
EPS Based on:
$
$
Incremental earnings per share Bonds: $ ___ Preferred:$ ___
4a. Assume the same facts as above except that net income included a loss from discontinued operations of $12,000 net of income taxes. Compute basic EPS. You do not have to calculate diluted EPS for this case. If required, round your answer to the nearest cent.
Basic earning per share: $ _____
4b. Show how the basic EPS you calculated should be reported to shareholders. You do not have to calculate diluted EPS.
Francis Company
EPS Computations
EPS Based on:
$
$
Explanation / Answer
Answer 1 : Basic Earning per share
Basic Earning per share = BE/BS
= 25700/ 10600
= 2.42
Working Notes
BE = Income available for common stock holders
Net Income 50000
Less: Intt on Bonds
(100000*6.5%) 6500
-------------
EBT 43500
Less Tax paid @ 30% 13050
----------------
Income after tax 30450
Less Dividend paid to
Prefered stock holder 4750
------------------
Amount Available common 25700
Stock holder -----------
BS = Weighted avaerage no. of common stock
= Share at begining 9600
May, 1 Share issued 1200 weight 1200 *8/12 800
SeP, 30 Share issued 800 Weight 800*3/12 200
------------
Total no. of shares 10600
-----------------
Answer - 2 Dialute Earning Per share
= Net Income/Avg shares+other convertible instuments
= (50000-1950)/15100
= 48050/15100
= 3.18
Working notes
Avg Share = 10600
Prefered stock (1000*2) = 2000
Bonds (100000/1000*25) = 2500
--------------------------
Total shares = 15100
---------------------------
Incremental EPS of Preferred Stock = 4750/2000
= 4750/2000
= 2.38
Incremental EPS of Bonds = interest/ incremental no. of shares due to conversion of bonds
= 6500-1950/2500
= 4550/2500
= 1.82
Answer 3 Incremental Earning per share
Bonds = $ 1.82
Preferred = $ 2.38