During 2016, Jackson Corporation had 600,000 shares of common stock and 50,000 shares of 9% preferred stock outstanding. The preferred stock does not have cumulative or convertible features. Jackson declared and paid cash dividends of $200,000 and $100,000 to common and preferred shareholders, respectively, during 2016.
On January 1, 2015, Jackson issued $3,000,000 of convertible 5% bonds at face value. Each $1,000 bond is convertible into five common shares.
Jackson's net income for the year ended December 31, 2016, was $4 million. The income tax rate is 15%.
a) What is Jackson's basic earnings per share for 2016, rounded to the nearest cent?
b) What will Jackson report as diluted earnings per share for 2016, rounded to the nearest cent?
Earnings Per Share (EPS):
Earnings per share (EPS) is computed by dividing the net income available to equity shareholders by the total number of shares outstanding at the period-end.
Answer and Explanation:
Requirement (a) & (b):
|Calculation for adjusted number of common stock|
|Equivalent number of issued common stock outstanding||600,000|
|Equivalent number of equity shares on bond conversion ($3,000,000 x 5/$1,000)||15,000|
|Total Number of adjusted number of shares for diluted EPS calculation (A)||615,000|
|Calculation for adjusted income for common stockholder|
|Add: Increase in income due to conversion of bond ($4,000,000 x 5%) x 85%||$170,000|
|Net Adjusted Income (B)||$4,170,000|
|(a) Basic EPS ($4,000,000/600,000)||$6.67|
|(b) Diluted-EPS (B/A)||$6.78|
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from Introduction to Business: Homework Help ResourceChapter 24 / Lesson 14