Question

Problem 19-14 (Algo) EPS; convertible preferred stock; convertible bonds; order of entry [LO19-7, 19-9, 19-10] Information...

Problem 19-14 (Algo) EPS; convertible preferred stock; convertible bonds; order of entry [LO19-7, 19-9, 19-10]

Information from the financial statements of Henderson-Niles Industries included the following at December 31, 2021:

Common shares outstanding throughout the year 100 million
Convertible preferred shares (convertible into 40 million shares of common) 65 million
Convertible 8% bonds (convertible into 13.5 million shares of common) $ 1,000 million


Henderson-Niles’s net income for the year ended December 31, 2021, is $600 million. The income tax rate is 25%. Henderson-Niles paid dividends of $2 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 millions (i.e., 10,000,000 should be entered as 10). Round "Earnings per share" answers to 2 decimal places.)

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Answer #1

Basic earnings per share = (net income - divided on preferred share)/weighted average common shares.

Basic EPS = ($600 million - ($2*65 million))/100

= ($600-$130)/100

Basic earnings per share = $4.7 per share

Diluted earnings per share= (net income - all preferred dividends + dividend on convertible preferred shares + (interest on convertible bonds(1-tax)))/weighted average common shares outstanding during the year + shares of convertible preferred shares + shares of convertible bonds

= ($600+$1000*8%(1-0.25))/100+40+13.5

= $660/153.5

Diluted earnings per share = $4.30 per share.

Thanks,

Let me know if you have any doubts.

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