Convertible Preferred stock, Convertible Bonds, and EPS Francis Company has 12,0
ID: 2730909 • Letter: C
Question
Convertible Preferred stock, Convertible Bonds, and EPS
Francis Company has 12,000 shares of common stock outstanding at the beginning of 2013. Francis issued 1,500 additional shares on on May 1 and 1,000 additional shares on September 30. It also has to convertible securties outstanding at the end of 2013. These are:
1. Convertible Preferred stock: 1,250 shares of 8.5%, $50 par, preferred stock were issued on January 2 , 2010, for $55 per share. Each share of preferred stock is converted into 3 shares of common stock. Current dividends has been declared and paid. To date, no preferred stock has been converted.
2. Converted bonds: Bonds with a face value of $125,000 and an interest rate of 5.5% were issued at par in 2012. Each &1,000 bond is convertible into 20 shares of common shares . To date, no bonds have been converted.
Francis earned net income of $50,000 during 2013. The income tax rate is 30%.
1. Compute the number of shares of common stock that Francis should in calculating basic earnings per share in 2013.
Weighted average shares outstanding shares
2. Calculated basic earnings per share for 2013. If required, round your answer to the nearest cent.
Basic earnings per share:$
3. Calculate diluted earning per shares for 2013 and the incremental EPS of the preferred stock convertible bonds. If required , round you answers to the nearest cent.
Diluted earnings per share:$
Incremental earnings per share
bonds:
Preferred:
4a. Assume the same facts as above except for net income included in the loss from discontinuted operations of $19,500 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.
4b. Show how the basic EPS you calculated should be reported to shareholders. You do not have to calculate diluted EPS.
Income from continuted operations
Loss from discontinuted operations
Net income
Explanation / Answer
1. The total number of shares = 12,000 + 1500 + 1000 = 14,500 shares
2. The basic EPS = Net Income/ Total shares = 50,000/14,500 = $3.45/share
3. Diluted EPS:
Number of shares of common stock = 14,500
Number of sharesconverted from prefrred stock if all of them are converted = 1250 *3 = 3750
Number of shares convererd from bonds if all of them are convereted = 125000*20/1000 = 2500
So total number of shares = 14500 + 3750 + 2500 = 20,750
Diluted EPS = 50000/20750 = $2.41/share
Incremental earnings per share bonds = 2500/(2500+3750) * (3.45-2.41) = 0.416 = 0.42
Incremental earnings per share of preferred stock = 1.04 - 0.42 = 0.62
4a. Now the net income = 50000 - 19500 = 30500
Basic EPS = 30500/14500 = 2.10
4b. Income From continued operations = 50,000
Loss from discontinued operations = 19.500
Net Income = 30,500 ( 50,000 -19,500)