Question

AAA corp reported net income of $230,000 and had 400,000 shares of common stock outstanding for...

AAA corp reported net income of $230,000 and had 400,000 shares of common stock outstanding for the whole year. The firm had 2,000 shares of 10%, 100 par, preferred stock outstanding for the year. Each share of preferred is convertible to 40 shares of common. During the year, it issued 1,200 $1,000 par value, 7% bonds. Each bond is convertible to 100 shares of common. The firm has 20,000 stock options outstanding, and each option allows the holder to purchase one share at $15 per share. The average market price of AAA's stock during the year was $20. Assume a 30% marginal tax rate.

Is the preferred stock dilutive?

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Answer #1

EPS for the whole year= Net Income/ no.of common stock

=$230,000/400,000

=$0.575

Conversion of preferred stock to common stock= 2000 preferred stock * 40

=80,000 common stock

no. of bonds representing stock options outstanding=20,000/100

=200

Interest outstanding on these outstanding stock options= 200*$1000* 7%

=$14,000

Revised Net Income=$230000+$14000= $ 244,000

Revised number of common stock=400,000+80,000=480,000

Revised EPS=$244,000/480,000=$0.508

So, EPS of AAA corp has been diluted from $ 0.575 to $ 0.508

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