Question

Francis Companyhas 24,000 shares of common stock outstanding at the beginning of 2019. Francis issued 3,000 additional shares on May 1 and 2,000 additional shares on September 30. It also has two convertible securities outstanding at the end of 2019. These are:
1. Convertible preferred stock: 2,500 shares of 85%, 550 par, preferred stock were issued on january 2, 2016, for $60 per share. Each share of preferred stock is convertible into 3 shares of common stock. Current dividends have been declared and paid.
To date, no preferred stock has been converted.
2. Convertible bonds: Bonds with a face value of 250,000 and an interest rate of 5.5% were issued at par in 2018. Each $1,000 bond is convertible into 20 shares of common stock. To date, no bonds have been converted.

Francis earned net income of $72,500 during 2019. The income tax rate is 30%.

Required:

1. Compute the number of shares of common stock that Francis should use in calculating basic earnings per share for 2019.
2. Calculate basic earnings per share for 2019.
3. Calculate diluted earnings per share for 2019 and the incremental EPS of the preferred stock and convertible bonds.
4. Next level Assume the same facts as above except that net income included a loss from discontinued operations of $18,000 net of income taxes. Compute basic BPS and show how it should be reported to shareholders. You do not have to calculate diluted BPS for this case.

Answer 1

Answer:

(1) The number of shares of common stock that Francis should use in calculating basic earnings per share for 2019 :

                                         = 24000 + 3000 + 2000

                                         = 29000

(2) Basic EPS for 2019

                   EPS = net income / outstanding shares

                           = 72500 / 29000

                           =  2.5

(3) Diluted EPS for 2019

           Diluted EPS = (net income - preferred stock dividned )/ (Common               Shares Outstanding + Unexercised Employee Stock Options + Convertible Preferred Stocks + Convertible Debt + Warrants)

                           =  72500/(29000+ 2500 + 250 )

                            = 2.28