Vent, Inc. reported net income of $770,000 for 2015. Vent sold 15,000 shares of treasury stock acquired in a previous year on July 1 and 15,000 new shares on November 1. At year end, 180,000 shares were outstanding. Vent had 20,000 shares of $100 par value 7% preferred stock outstanding all year. Vent paid dividends to the preferred shareholders.
a. What is the weighted average number of common shares used to compute earnings per share for 2015?
b. Calculate the basic earnings per share for 2015.
c. If each share of preferred stock is convertible into 2 shares of common stock, what is the diluted earnings per share for 2015?
Earning Per Share:
Earning per share are calculated by deducting the preferred share with the net earning and then the result is divided by the weighted average number of share. It is calculated for the common shares only.
Answer and Explanation:
(a) Weighted average number of outstanding shares = (150,000 x (12/12)) + (15,000 x (6/12)) + (15,000 x (2/12)) = 160,000 shares
(b) Basis EPS = (Net profit - Preferred divided) / Weighted average number of common shares outstanding during the period Basis EPS = 770,000 - (20,000 x 100 x 7%) / 160,000
Basis EPS = $3.94 per share
(c) Diluted EPS = (Profit or loss attributable to common equity holders + After-tax interest on convertible debt + Convertible preferred dividends) / (Weighted average number of common shares outstanding during the period + All dilutive potential common stock)
Diluted EPS = 770,000 / (160,000 + (20,000 x 2))
Diluted EPS = $3.85 per share
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from Introduction to Business: Homework Help ResourceChapter 24 / Lesson 14