Question

PART 1

Bonita Corporation had 116,400 shares of stock outstanding on January 1, 2020. On May 1, 2020, Bonita issued 68,400 shares. On July 1, Bonita purchased 9,240 treasury shares, which were reissued on October 1.

Compute Bonita’s weighted-average number of shares outstanding for 2020.

Weighted-average number of shares outstanding

PART 2

Larkspur Corporation reported net income of $181,440 in 2020 and had 45,900 shares of common stock outstanding throughout the year. Also outstanding all year were 5,400 shares of cumulative preferred stock, each convertible into 2 shares of common. The preferred stock pays an annual dividend of $5 per share. Larkspur’s tax rate is 50%.

Compute Larkspur’s 2020 diluted earnings per share. (Round answer to 2 decimal places, e.g. 3.55.)

Diluted earnings per share

$

Answer 1

Part 1

Months	No. of months	No. of shares	No. of shares outstanding	Calculation	Weighted average shares
January to April	4	116,400	116,400	116400*4/12	38,800
May to June	2	116,400+68,400	184,800	184800*2/12	30,800
July to September	3	184800 – 9240	175,560	175560*3/12	43,890
October to December	3	175560 + 9240	184,800	184800*3/12	46,200
Weighted average number of shares	159,690

Part 2

When preferred shares would be converted into equity, the net income will rise.

Adjusted net income = 181,440 + (5400*5*50%) = $ 194,940

Adjusted number of shares = 45,900 + 5400*2 = 56,900

Diluted EPS = Adjusted net income/Adjusted number of shares = 194,940/56900 = 3.43