Question

Oriole Inc. had net income for the current year ending December 31, 2017 of $919,840. During the entire year, there were 509,000 common shares outstanding. The company had two classes of preferred shares outstanding: the Class A preferred shares were $2.00 cumulative shares of which 12,000 were outstanding, and were convertible to common shares at a rate of 1:1. There were 105,000 $6.00 Class B non-cumulative preferred shares outstanding that were also convertible at a rate of 1:1. Oriole had outstanding a $1,000,000, 6% bond issued in 2009 that was convertible to 22,000 common shares. The company also had outstanding a $1,000,000, 4% bond issued in 2010 that was convertible to 26,000 common shares. No dividends were declared or paid this year. Oriole’s tax rate is 37%.

1. Calculate basic earnings per share. (For simplicity, ignore the requirement to record the debt and equity portions of the convertible bond separately.)

2. Calculate diluted earnings per share. (For simplicity, ignore the requirement to record the debt and equity portions of the convertible bond separately.)

Answer 1

1.

Basic earnings per share

$1.81

2.

Diluted earnings per share

$1.36

Working:

Net income	A	919840
Common shares outstanding	B	509000
Common shares from Class A preferred shares	C	12000
Common shares from Class B preferred shares	D	105000
Common shares from 6% bonds	E	22000
Common shares from 4% bonds	F	26000
Total number of common shares if all are converted (B+C+D+E+F)	G	674000
Basic earnings per share (A / B)		$1.81
Diluted earnings per share (A / G)		$1.36