Question

Ignatius Corporation had 7 million shares of common stock outstanding during the current calendar year. It issued ten thousand $1,000, convertible bonds on January 1. Each bond is convertible into 50 shares of common stock. The bonds were issued at face amount and pay interest semiannually at an annual rate of 10%. On June 30, Ignatius issued 100,000 shares of $100 par 6% cumulative preferred stock. Dividends are declared and paid quarterly. Ignatius has an effective tax rate of 40%. Ignatius would report the following EPS data (rounded) on its net income of $20 million:
Basic EPS Diluted EPS
a. 2.77 2.67
b. 2.81 2.71
c. 2.85 2.67
d. 2.81 2.68
A) Option a
B) Option b
C) Option c
D) Option d

Answer 1

Answer:

B) Option b

Explanation:

basic EPS = (net income - preferred dividends) / weighted average common stocks = [$20,000,000 - (100,000 x $100 x 6% x 6/12)] / 7,000,000 = ($20,000,000 - $300,000) / 7,000,000 = $2.81

diluted EPS = [$20,000,000 - (100,000 x $100 x 6% x 6/12) + (10,000 x $1,000 x 10% x 60%)] / [7,000,000 + (10,000 x 50)] = $20,300,000 / 7,500,000 = $2.71