# 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} 