Question

Pepper Company had $900,000 net income in 2021. On January 1, 2021 there were 350,000 shares of common stock outstanding. On April 1, Pepper bought 40,000 shares of treasury stock and on September 1, 20,000 shares were issued. On December 1, a 2-for-1 stock split was declared and distributed. There are 50,000 options to buy common stock at $40 a share outstanding. The market price of the common stock averaged $50 during 2021. The tax rate is 40%.

During 2021, there were 40,000 shares of convertible preferred stock outstanding. The preferred is $100 par, pays $4.50 a year dividend, and is convertible into three shares of common stock.

Pepper issued $2,000,000 of 8% convertible bonds at face value during 2020. Each $1,000 bond is convertible into 30 shares of common stock.  

REQUIRED: Calculate the weighted average number of shares of common stock to be used to calculate basic earnings per share for 2021.  Round your answer to the nearest whole dollar.

Answer 1

#) Adjust the stock split into the shares outstanding before stock split. (Stock split is 2 for 1, so shares outstanding before stock split should multiply by 2 for adjustment)

January 1, 2021 = 350000 * 2 = 700000 Shares

April 1              = (40000 * 2) = (80000) shares

September 1               = 20000 *2 = 40000 shares

#) Calculation of weighted average common shares

Months shares are outstanding	Shares outstanding	Fraction of year outstanding	Equivalent whole units
January – March	700000	3/12	175000
April – August	620000 (700000 – 80000)	5/12	258334
September – December	660000	4/12	220000
Weighted average number of shares of common stock to be used to calculate basic EPS	653334 Shares