Pop Company had 100,000 shares of common stock outstanding on January 1, 2014. O
ID: 2755666 • Letter: P
Question
Pop Company had 100,000 shares of common stock outstanding on January 1, 2014.
On September 30, 2014, Pop sold 48,000 shares of common stock for cash.
Pop had 10,000 shares of convertible preferred stock outstanding throughout 2014. Each preferred stock is $100 par, 6%, and is convertible into 3 shares of common stock.
Pop also had 500, 8%, convertible bonds outstanding throughout 2014. Each $1,000 bond is convertible into 30 shares of common stock. The bonds sold originally at par.
Net income for 2014 was $300,000 and the tax rate is 40%.
The preferred dividends were paid in 2014.
A)Basic earnings per share reported by Pop Company for 2014 is?
B) Diluted earnings per share reported by Pop Company for 2014 is ?
Explanation / Answer
Calculation of weighted average outstanding shares:
100,000 x 9/12 = 75,000
148,000 x 3 / 12 = 37,000
Total = 75,000 + 37,000 = 112,000
A) Calculation of Basic Earnings Per Share =
EPS = Net Income - Preferred Dividend / Weighted average shares outstanding
Preferred Dividend = 100 x 6% = $6 Per Share
Total dividend = 10,000 x 6 = $60,000
Basic EPS = 300,000 - 60,000 / 112,000 = $2.14 per share
B) Diluted Earnings Per Share =
After Tax interest on bond = 1000 x 8% = 80 x 500 = 40,000 x (1-0.40) = $24,000
Add: Net Income 300,000 = 324,000
Total Shares = Covertible bonds if converted in shares = 500 x 30 = 15,000
Preferred Stock converted in equity = 10,000 x 3 = 30,000
Total weighted diluted shares outstanding = 112,000 + 15,000 + 30,000 = 157,000
Diluted Earnings Per Share = 324,000 / 157,000 = $2.06 Per Share