Answer:
The diluted EPS is $1.65
Explanation:
Solution
The Numerator (Basic EPS):
The Net income = $1,050 million
The Preferred dividends= 3mn * 9% * $ 100 = $ 27 million
because the preferred stock is cumulative, the dividend is deducted whether or not paid)
The Denominator (Basic EPS): Weighted average Number of shares
Now,
common stock outstanding (1/1 – 12/31) 600 million x (12/12) *1.05 = 630 million
The Treasury shares purchased (3/1 – 12/31) (24) million x (10/12) *1.05 =(21) million
The shares treasury sold (10/1 – 12/31) (4) million x (3/12) =1
The average weighted number of shares =610 million
so,
Basic EPS = ($1,050-27) ÷ 610 = $1.68
Stock Options
The stock choice are dilutive because exercise price is lesser than market price of $ 70 per share.
By applying the treasury stock method.
Exercise is supposed to take place at the later of the date of issue (9/13/21) or the beginning of the year (1/1/21). Assume exercise 1/1/21
The Treasury Stock Method suggests that the proceeds received upon exercise of $1,680 (30 million x $56) are used to purchase back stock at the market price average, for example $1,680 ÷ $70 = 24 million
The net goes higher in the number of shares = 6 million (30 million issued upon exercise – 24 million repurchased)
Convertible Bonds
By applying method if bonds are transformed into common stock. however,a step by step approach to calculate nature of dilution. is determined
Now,
The shares issued on conversion = 6 million
The Interest paid, net of tax = $3 [(8% x $50) x 75%]
The Interest per shares issued = 3/6 = $ 0.5 per share
The EPS without assumed conversion = ($1,050 - $27+3) ÷ (610 + 6+6) = $1.65
The convertible bonds are dilutive because $1.65 is less than $1.68
Therefore, diluted EPS = ($1,050 - $27+3) ÷ (610 + 6+6) = $1.65
