Question

Company Blah Blah Blah (BBB) has the following Capital Structure as of January 1, 2019:

                Preferred Shares, 150,000 outstanding, 8% cumulative                                   $56,000,000

                Common Shares, 1,000,000 outstanding, 1,500,000 authorized                   110,000,000

                Debt – 6 years, 10% coupon rate, issued at par, convertible                          560,000,000       

During the year the following transactions occurred:

• On February 1^st, 100,000 Common Shares were bought and retired for $205 per share;
• On April 1^st, 2:1 stock split was declared and paid, market price was $110
• On June 1^st, 15,000 Common Shares were issued for $115 per share;
• On October 1^st, 1% stock dividend was declared and paid, market price was $105;
• Due to cash flow issues, no cash dividends were declared or paid during the period;
• Net Income for the period was $25,000,000, which includes a $750,000 pretax loss from a Discontinued Operation and a 25% tax rate.
• The Bonds are convertible into Common Shares – every $1,000 of Bonds can be converted into 5 Common Shares;
• There are 50,000 options past their vesting period and expire in two years – each option can be converted into 1 Common Share for $100;
• Market Price of the Common Shares during the year:
  • January 1, 2018 at $90;
  • December 31, 2018 at $112.50;
  • 12 month average at $115.00.

Required: Based on the above information, please calculate the Basic and Diluted Earnings Per Shares for BBB for December 31, 2019.

Answer 1

EPS (Earnings Per Share) = Earning attributable to ordinary shares during period
Weighted Average of outstanding shares during the
period

Earning attributable to ordinary shares during period would be calculated in the following manner,

For calculating Weighted Average of outstanding shares during the period adjustments for sale or issue of common stock is done.

Whenever Stock-dividend is declared or stock split takes place, then restatemet of Previous year EPS is also required. Since, in the given question Pervious Year data is not given. Hence, we will calculate EPS for current year only.

Weighted Average of outstanding shares during the period would be calculated in the following manner,

Stock Split Ratio = 2

Stock Dividend Ratio = 101% = 1.01

These ratios are multiplied by Weighted Average No. of Common Stock before the date of Stock Split or Stock Dividend, and accordingly has been done.

Hence, Basic Earning Per Share (BEPS) = 20520000 / 1843670
= $ 11.13

This BEPS can futher be bifercated for Income from Continued Operations and Income from discontinued Operations.

Here, Earning attributable to ordinary shares during period for the same would be -

Continued Operations = $ 25562500 ($ 25000000 + After Tax loss from discontinued Operations of $ 562500)

Discontinued Operations = -750000 + 187500 (Tax Benefit due to loss = 750000 X 25%)
= - $ 562500

Diluated Earning Per Share

Diluated Earning Per Share (DEPS) is additionally reported along with BEPS, which is calculate by adjusting Earning attributable to ordinary shares during period and Weighted Average of outstanding shares during the period for potential Common Stock.

Potential Common Stock are those Securities that have potential to be converted into Common Stock at a future date, such as Convertiable debt, Convertible Preferred Stock and Options.

Adjustment for the same would be in the following manner-

Adjusted Earning attributable to ordinary shares during period

Adjusted Weighted Average of outstanding shares during the period

Hence, DEPS = 67000000 / 7903670
= $ 8.48

This DEPS can futher be bifercated for Income from Continued Operations and Income from discontinued Operations.

Here, Earning attributable to ordinary shares during period for the same would be -

Continued Operations = $ 67562500 ($ 67000000 + After Tax loss from discontinued Operations of $ 562500)

Discontinued Operations = -750000 + 187500 (Tax Benefit due to loss = 750000 X 25%)
= - $ 562500