Question

The information below pertains to Barkley Company for 2015.

Answer 1

Answer:

a. $1.38

b. anti-dilutive.

Explanation:

Basic Earnings Per Share = Earnings Attributable to Holders of Common Stock / Weighted Average Number of Common Stock Holders

Earnings Attributable to Holders of Common Stock Calculation :

Net income for the year                                                        $1,160,000

Less Bond Interest after tax ($2,010,000 × 7% × 80%)        ($112,560)

Less Preference Stock dividend ($4,080,000 × 6%)          ($244,800)

Earnings Attributable to Holders of Common Stock           $802,640

Weighted Average Number of Common Stock Holders Calculation :

Common Stock (5,800,000 / $10)                                          580,000

Weighted Average Number of Common Stock Holders      580,000

Basic Earnings Per Share = $802,640 / 580,000

                                           = $1.38

Diluted Earnings Per Share = Adjusted Earnings Attributable to Holders of Common Stock / Adjusted Weighted Average Number of Common Stock Holders

Adjusted Earnings Attributable to Holders of Common Stock Calculation :

Earnings Attributable to Holders of Common Stock                    $802,640

Add Back Bond Interest after tax ($2,010,000 × 7% × 80%)         $112,560

Add Back Preference Stock dividend ($4,080,000 × 6%)           $244,800

Adjusted Earnings Attributable to Holders of Common Stock   $1,160,000

Adjusted Weighted Average Number of Common Stock Holders Calculation

Weighted Average Number of Common Stock Holders                 580,000

Add Convertible Bonds ($2,010,000 / $1,000 × 30)                          60,000

Add Convertible Preference Shares ($4,080,000/$100 ×3)            122,400

Less Common Stock Options                                                              (82,100)

Adjusted Weighted Average Number of Common Stock Holders 680,300

Diluted Earnings Per Share =  $1,160,000 / 680,300

                                              =  $ 1.70

Conclusion : Convertible Bonds, Convertible Preference Shares and Common Stock Options are anti-dilutive.