Question

A firm with a net income of $30,000 and weighted average actual shares outstanding of 15,000 for the year also had the following two securities outstanding the entire year: (1) 2,000 options to purchase one share of stock for $12 per share. The average share price during the year was $20, (2) cumulative convertible preferred stock with an annual dividend commitment of $4,500. Total common shares issued on conversion are 2,900. Compute diluted EPS for this firm.
A. $1.70B. $1.60C. $1.55D. $1.61

Answer 1

Answer:

A. $1.70

Explanation:

Available Information:

Actual average number of shares outstanding = 15,000 shares

Total common shares issued on conversion = 2,900 share

First Calculate Weighted average number of shares outstanding using following formula:

Weighted average number of shares outstanding = Actual average number of shares outstanding + Total common shares issued on conversion

Weighted average number of shares outstanding = 15,000 + 2,900

Weighted average number of shares outstanding = 17,900 shares

Now Put all the value in the following formula of Diluted EPS:

Diluted EPS = Net Income - Preferred dividend / Weighted average number of shares outstanding

Diluted EPS = ( $30,000 - $4,500 ) / 15000 shares

Diluted EPS = $25,500 / 15000 shares

Diluted EPS = $1.70 / Share