Question

The information below pertains to Baker Co. for 2017.

Net income – 2017	$1,200,000
8% convertible bonds issued at par ($1,000 per bond); each bond is convertible into 30 shares of common stock	$2,000,000
6% convertible, non-cumulative, preferred stock, $100 par value, each share is convertible into 3 shares of common stock	$4,000,000
Common stock, $10 par value	$6,000,000
Tax rate for 2017	40%
Average market share price of common stock for 2017	$25 per share

The company did have common stock options (granted last year) to purchase 75,000 shares of common stock at a price of $20 per share.

During the year, the following transactions took place related to equity:

            May 1 - Issued 50,000 shares of common stock for $28 per share

            June 1 – Declared a 4% stock dividend effective on July1.

Compute basic EPS for 2017

Answer 1

Net income = $1,200,000 (Given)

Less: Interest expense = $160,000 (8% of $ 2,000,000 which are convertible bonds)

Net income after interest before tax = $ 1,040,000

Less: Tax @ 40% = $ 416,000 (40% of $ 1,040,000)

Earnings for preference stock holders = $ 624,000

Less: preference dividend = $ 240,000 (6% of $ 4,000,000)

Earnings for common stock holders = $ 384,000

No of common stock outstanding = 600,000 ($ 6,000,000/10)

Basic Eps = $ 0.64 (Earnings for common stock holders / No of common stock outstanding)

If any adjustments made to Denominator or Numerator of Basic Eps, we will get Diluted Eps.