Question

XYZ Company had 200,000 shares of common stock outstanding on December 31, 2020. On July 1, 2021, XYZ issued an additional 55,000 shares for cash. On January 1, 2021, XYZ issued 25,000 shares of convertible preferred stock. The preferred stock had a par value of $100 per share and paid a 5% dividend. Each share of preferred stock is convertible into 8 shares of common. During 2021, XYZ paid the regular annual dividend on the preferred and common stock. Net income for the year was $350,000. Required: Calculate XYZ's basic and diluted earnings per share for 2021.

basic:

diluted:

Answer 1

Basic EPS = (Net Income – Preferred Dividend)/No of shares outstanding

Preferred Dividend = ($100 * 5% * 25000) = $125000

No of shares outstanding = Beginning outstanding shares + Additional shares

                = 200000 + (55000 * 6/12) = 227500

EPS = ($350000 - $125000)/227500 = $0.99

Diluted EPS = Net Income/No of shares outstanding

No of shares outstanding = Beginning outstanding shares + Additional shares + Convertible Preferred stock to equity

         = 200000 + (55000 * 6/12) + (25000 * 8) = 427500

EPS = $350000/427500 = $0.82