Question

Sonic Ltd. had 2,200,000 average shares outstanding during all of 2017. During 2017, Sonic also had 50,000 options outstanding with exercise prices of $17 each. The average stock price of Sonic during 2017 was $21. This company also had 1,000 shares of preferred stock outstanding (10%, $100 par value) for the entire year, which are each convertible into 20 shares of common stock. Sonic had $3,200,000 net income for the year. Corporate tax rate is 30%.

a)What is the basic EPS share for 2017? [1 Mark]

b)For purposes of computing diluted earnings per share, how many shares would be used in the denominator? [3 Marks]

c)What is the diluted EPS for 2017? [1 Mark]

Answer 1

a]

basic EPS = net income / shares outstanding

basic EPS = $3,200,000 / 2,200,000

basic EPS = $4.45

b]

shares used in denominator =  shares outstanding + options outstanding + (preferred shares outstanding * conversion ratio)

shares used in denominator =  2,200,000 + 50,000 + (1,000 * 20)

shares used in denominator = 2,270,000

c]

diluted EPS = net income / adjusted shares outstanding

diluted EPS = $3,200,000 / 2,270,000

diluted EPS = $1.41