Question

# Paul Company had 100,000 shares of common stock outstanding on January 1, 2018. On September 30,...

Paul Company had 100,000 shares of common stock outstanding on January 1, 2018. On September 30, 2018, Paul sold 45,000 shares of common stock for cash. Paul also had 8,500 shares of convertible preferred stock outstanding throughout 2018. The preferred stock is \$100 par, 5%, and is convertible into 3 shares of common for each share of preferred. Paul also had 470, 7%, convertible bonds outstanding throughout 2018. Each \$1,000 bond is convertible into 30 shares of common stock. The bonds sold originally at face value. Reported net income for 2018 was \$270,000 with a 40% tax rate. Common shareholders received \$1.70 per share dividends after preferred dividends were paid in 2018. Required: Compute basic and diluted earnings per share for 2018. (Round your answers to 2 decimal places.)

Basic Earnings per Share = Earnings available for Equity Shareholders/Weighted average of equity shares outstanding during the year]

= 99760/111,250 = \$0.90

Diluted Earnings per Share = 270000(1-.4)/(100000+45000+8500*3+470*30)

= 162000/184600 = \$0.88

Earnings available for Equity

Net Income = 270,000

Less: Interest on Bonds = 32,900

EBT = 237,100

Less: Tax@40% 94,840

EAT 142,260

Less: Preference Dividend = 42,500

Earnings for Equity = 99,760

Weighted Average Number of Equity Shares:

Outstanding on Jan 1 = 100,000

Sold for Cash 45000*3/12 = 11,250

Weighted Average of Equity Shares outstanding = 111,250

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