Question

Information from the financial statements of Ames Fabricators, Inc., included the following:
  

	December 31
		2021			2020
Common shares		100,000			100,000
Convertible preferred shares (convertible into 44,000 shares of common)		15,600			15,600
8% convertible bonds (convertible into 30,000 shares of common)	$	1,000,000		$	1,000,000

Ames’s net income for the year ended December 31, 2021, is $560,000. The income tax rate is 25%. Ames paid dividends of $5 per share on its preferred stock during 2021.

Required:

Compute basic and diluted earnings per share for the year ended December 31, 2021. (Enter your answers in thousands. Do not round intermediate calculations.)

Answer 1

Basic EPS = Net Income - Preference dividend / Outstanding shares

= ($560,000 - $5 x 15,600 shares) / 1,00,000 = $4.82

Under diluted EPS, all potential instruments that are convertible into common share are assumed to have been converted

Diluted EPS = Net Income / Outstanding shares

$560,000= Income before tax x (1 - 25%)

Income before tax = $746,667

Income before Interest = $746,667 + $80,000 = $826,667

New net income for diluted EPS = $826,667 x (1 - 25%) = $620,000

Diluted outstanding shares = 100,000 + 44,000 + 30,000 = 1,74,000

Diluted EPS = $620,000 / 1,74,000 = $3.56