Question

Throughout 2015, Smith had 150,000 shares of common stock outstanding. Smith's net income for the year ended December 31, 2015 was $800,000. Smith's income tax rate is 20%. During 2015, Smith declared and paid dividends on its 10,000 shares of 6% convertible preferred $100 par value stock. Each share of the convertible preferred stock can be converted, at the discretion of the stockholder, into 3 shares of Smith's common stock.

During the entire year ending 12-31-15, Smith had 15,000 outstanding employee stock options. Each option had an exercise price of $30 per share of Smith common stock. During the year ended 12-31-15, the average market price of Smith's common stock was $50 per share.

As of 12-31-15, Smith had $10,000,000 of 5% convertible bonds. Smith issued the bonds at face value during 2012. The bonds can be converted into 15,000 shares of Smith's common stock. What will Smith report as its basic earnings per share for the year ended 12-31-15?

Answer options:

A.$5.01

B.$3.87  

C. $4.13

D. $5.33

E. $4.93

Answer 1

Basic EPS = Net income attributable to equity shareholders / Average no. of outstanding equity shares

Net income = 800,000

less tax @ 20% = 800,000 * 20% = 160,000

Income after tax = 800,000 - 160,000 = 640,000

Less preference dividend = Number of shares * par value * Rate of dividend

= 10,000 * 100 * 6% = 60,000

Net income attributable to equity shareholders = 640,000 - 60,000 = 580,000

Number of equity shares outstanding as on 12-31-2015 = 150,000 shares

Basic EPS = 580,000 / 150,000 = $3.87

Right answer is option B. $3.87

Here given net income is considered as net income before tax that's why income tax expense deducted from given net income