Question

On December 31, 2020, Ignatius Corporation had 7 million shares of common stock and 600,000 shares of 6% cumulative preferred stock (par $100).

February 28, 2021: purchased an 600,000 shares of common stock as treasury stock for $50 per share
September 30, 2021: sold 300,000 treasury shares for $60 per share

Net income for 2021 was $900,000. The tax rate for the year was 25%.

Also outstanding during the year were fully vested incentive stock options giving key officers the option to buy 1,000,000 common shares
at $60. The market price of the common shares averaged $75 during 2021.

Required:

Compute basic and diluted EPS (rounded to 2 decimal places) for the year ended December 31, 2021. Show your computations for both the numerator and denominator for both.

Answer 1

Ans:

Basic EPS :

Basic EPS = Earning available for equity / number of common stock outstanding

Net income: $900,000

Preferred stock outstanding @100 per share = 600,000*100 = 60,000,000

Preference dividend = 6% of 60,000,000 = $3,600,000

Income/(loss) attributed for equity = $900,000 - $3,600,000 = ($2,700,000)

Common stock outstanding = 7,000,000

Less treasury stock at the end of the year = 600,000-300,000 = 300,000

Stock outstanding for EPS = 7,000,000 - 300,000 = 6,700,000

Basic EPS = -$2,700,000/6,700,000 = -$0.40 per share.

Diluted EPS =

Income available for Equity / Diluted number of outstanding shares

Income (loss) available for equity = ($2,700,000)

Stock outstanding for EPS = 7,000,000 - 300,000 = 6,700,000

Stock option if converted = 1,000,000

Outstanding Diluted stock = 6,700,000+1,000,000 = 7,700,000

Diluted EPS = -$2,700,000/7,700,000 = -$0.35 per share.