Question

Information from the financial statements of Henderson-Niles Industries included the following at December 31, 2018: Common shares outstanding throughout the year: 100 million Convertible preferred shares (convertible into 10 million shares of common): 30 million Convertible 10% bonds (convertible into 17.0 million shares of common): $ 2,200 million Henderson-Niles’s net income for the year ended December 31, 2018, is $840 million. The income tax rate is 40%. Henderson-Niles paid dividends of $2 per share on its preferred stock during 2018. Required: Compute basic and diluted earnings per share for the year ended December 31, 2018. (Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)

Answer 1

Answer:

The basic and diluted earnings per share for the year ended December 31, 2018 are $ 0.24 / Share and $8.89 /share respectively.

Explanation:

BASIC EPS CALCULATION

The preferred dividend = 30 million x $ 2/share

                                        = 60 Million

Basic EPS = ( Net income - preferred dividends ) / weighted average common shares

                 = ($840 million - $ 60 Million ) / 100   million

                 = $ 0.24 / Share

DILUTED EPS CALCULATION

After-tax bond interest expense    =   $ 2.200 million x 10%

                                                         = $ 220 Million

$ 220 Million x (100 + 40%) = $ 308 Million after-tax interest expense.

Shares assume converted to common

Common Shares = 100 Million            

Preferred stock = 40 Million

Convertible bonds   = 17.0 Million

Total = 157 Million shares outstanding  

Diluted EPS   = ( $ 840 Million - $60 Million  + $308 Million+ $ 66 Million ) / 157 million  

                       = $8.89 /share

Therefore, The basic and diluted earnings per share for the year ended December 31, 2018 are $ 0.24 / Share and $8.89 /share respectively.