The following information pertains to Prancer Company for 2015: Common stock, $10 par value,...

Question:

The following information pertains to Prancer Company for 2015:

Common stock, $10 par value, outstanding on 1/1/2015 was 1,000,000 shares. On 3/1, 500,000 shares of common stock were sold for $42 per share; on 5/1, a 20% stock dividends were issued; on 10/1, 100,000 shares of common stock were purchased back for $35 per share and held as treasury stock.

$2,500,000, 9% convertible bonds issued at par ($1,000 per bond); each bond is convertible into 50 shares of common stock after adjusting for stock dividends. $4,000,000, 6% convertible, cumulative preferred stock, $100 par value, were issued in a prior year; each share is convertible into 3 shares of common stock after adjusting for stock dividends.

Stock options were granted in a prior year to purchase 100,000 shares of common stock at $25 per share after adjusting for stock dividends. Average market price of common stock were $40 per share after adjusting for stock dividends. None of the convertibles were converted and none of the options were exercised during 2015. Net income for 2015 was $2,500,000 and tax rate was 30%.

1.) Compute basic earnings per share for 2015.

2.) Compute diluted earnings per share for 2015.

Earning Per Share:

Earning per share is calculated by dividing the net income from the operation by the number of common shares outstanding. Higher earnings per share indicate higher profitability for the investors.

Answer and Explanation:

1.)

Data:

Net income = $2,500,000

Outstanding shares = 1,000,000 shares

Stock dividend = 20%

Tax rate = 30%

Finding:

Basic earnings per share for 2015 can be calculated as follow:

{eq}Basic \ earnings \ per \ share \ for \ 2015 \ = \ \dfrac{Net \ income \ \times \ \left ( 1 \ - \ Tax \ rate \right )}{Outstanding \ shares \ \times \ \left ( 1 \ + \ Stock \ dividend \right )} \\ Basic \ earnings \ per \ share \ for \ 2015 \ = \ \dfrac{2,500,000 \ \times \ \left ( 1 \ - \ 0.30 \right )}{1,000,000 \ \times \ \left ( 1 \ + \ 0.20 \right )} \\ Basic \ earnings \ per \ share \ for \ 2015 \ = \ \dfrac{2,500,000 \ \times \ 0.70}{1,000,000 \ \times \ 1.20} \\ Basic \ earnings \ per \ share \ for \ 2015 \ = \ \$1.46 \ per \ share {/eq}


2.)

Net Income for diluted EPS = Net Income + interest on convertible bonds and dividend on conv. preferred shares

Net Income for diluted EPS = (2,500,000 + 225,000 + 240,000) * (1 - 0.30)

Net Income for diluted EPS = $2,075,500


{eq}Shares \ for \ diluted \ EPS \ = \ 1,200,000 \ + \ \left ( \dfrac{2,500,000}{1,000} \ \times \ 50 \right ) \ + \ 120,000 \ + \ \left ( 100,000 \ \times \ \dfrac{25}{40} \right ) \\ Shares \ for \ diluted \ EPS \ = \ 1,200,000 \ + \ 125,000 \ + \ 120,000 \ + \ 62,500 \\ Shares \ for \ diluted \ EPS \ = \ 1,507,500 \ shares {/eq}


{eq}Diluted \ EPS \ = \ \dfrac{Net \ Income \ for \ diluted \ EPS}{Shares \ for \ diluted \ EPS} \\ Diluted \ EPS \ = \ \dfrac{2,075,500}{1,507,500} \\ Diluted \ EPS \ = \ \$1.38 \ per \ share {/eq}


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