# At January 1, 2016, Canaday Corporation had outstanding the following securities: 780 million...

## Question:

780 million common shares

40 million 8% cumulative preferred shares,

$50 par 5% convertible bonds,$2,500 million face amount, convertible into 70 million common shares.

The following additional information is available:

On September 1, 2016, Canaday sold 72 million additional shares of common stock.

Incentive stock options to purchase 40 million shares of common stock after July 1, 2015, at $14 per share were outstanding at the beginning and end of 2016. The average market price of Canaday's common stock was$20 per share during 2016.

Canaday's net income for the year ended December 31, 2016, was 1,548 million. The effective income tax rate was 40%. Required: Calculate diluted earnings per common share for the year ended December 31, 2016. ## Earnings per Share: Earnings per share represents income available to the common shareholders from the profits of the company. It is calculated by dividing net income available to equity shareholders by common shares outstanding. ## Answer and Explanation: {eq}\begin{align*}{\rm\text{Diluted Earnings per Common Share}} &= \dfrac{{{\rm\text{Net Income}} - {\rm\text{Preference Dividend}} + {\rm\text{After tax Interest Saving}}}}{{{\rm\text{Shares at Jan1}} + {\rm\text{New Shares}} + {\rm\text{Excersice of Option}} + {\rm\text{Conversion of Bonds}}}}\\ &= \dfrac{{\ 1,548 - \$160 + \$ 75}}{{780 + \left( {72 \times \dfrac{4}{{12}}} \right) + \left( {40 - 28} \right) + 70}}\\ &= \dfrac{{\$1463}}{{886}}\\ &= \$ 1.651 \end{align*} {/eq}

Working notes:

{eq}\begin{align*} {\rm{Preference\ Dividend}} &= \left( {{\rm\text{Preference Shares}} \times {\rm\text{Cost per share}}} \right) \times {\rm\text{Dividend Rate}}\\ &= \left( {40\,{\rm\text{million}} \times {\rm\text{\$50 per share}}} \right) \times 8\% \\ &= \$ 160 \end{align*} {/eq}

{eq}\begin{align*} {\rm\text{After Tax Saving}} &= {\rm\text{Interest Amount on Bond}} - \left( {{\rm\text{Interest Amount on Bond }} \times {\rm\text{Tax Rate}}} \right)\\ &= \left( {\$2500\,{\rm\text{million}} \times {\rm\text{5% }}} \right) - \left( {\$ 2500\,{\rm\text{million}} \times {\rm\text{5% }} \times 40\% } \right)\\ &= \$125 - \left( {\$ 125 \times 40\% } \right)\\ &= \$125 - \$ 50\\ &= \75 \end{align*} {/eq} Computation of treasury shares:  Particulars Amount Shares 40 million Multiply: Exercise Price $14 Proceeds$560 million Divided: Average Market Share Price \$20 Treasury Shares 28 million