Question

"The information below pertains to Barkley Company for 2021.Net income for the year $1,200,0007% convertible bonds issued at par ($1,000 per bond); each bond is convertible into30 shares of common stock 2,000,0006% convertible, cumulative preferred stock, $100 par value; each share is convertibleinto 3 shares of common stock 4,000,000Common stock, $10 par value 6,000,000Tax rate for 2021 20%Average market price of common stock $25 per shareThere were no changes during 2021 in the number of common shares, preferred shares, or convertible bonds outstanding. There is no treasury stock. The company also has common stock options (granted in a prior year) to purchase 75,000 shares of common stock at $20 per share."Instructions

(a) Compute basic earnings per share for 2015. (b) Compute diluted earnings per share for 2015.

Answer 1

Answer:

EPS 1.6

diluted EPS 1.230769231

Explanation:

$EPS = \frac{income-preferred \: dividends}{outstanding \: common \: stock}$

Income 1200000

preferred dividend:

2,000,000 x 0.06 = 240000

Oustanding common stock:

6.000.000 / $10 par value each = 600,000 shares

$EPS = \frac{1200000-240000}{600000}$

EPS 1.6

Diluted EPS will consider the EPS if all bonds or preferred stocks are converted into common stock

Bonds: 2,000,000 / 1,000 = 2000 bonds

each at 30 shares = 60,000

Preferred 4,000,000 / 100 = 40,000 preferred shaers

each can convert into 3 shares: 120,000 common stock

total potential common stock:

600,000 + 60,000 + 120,000 = 780,000

$diluted \: EPS = \frac{1200000-240000}{780000}$

EPS 1.230769231