Answer:
a. $1.38
b. anti-dilutive.
Explanation:
<em>Basic Earnings Per Share = Earnings Attributable to Holders of Common Stock / Weighted Average Number of Common Stock Holders</em>
<u>Earnings Attributable to Holders of Common Stock Calculation :</u>
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
<u>Weighted Average Number of Common Stock Holders Calculation :</u>
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
<em>Diluted Earnings Per Share = Adjusted Earnings Attributable to Holders of Common Stock / Adjusted Weighted Average Number of Common Stock Holders</em>
<u><em>Adjusted</em></u><u> Earnings Attributable to Holders of Common Stock Calculation :</u>
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
<em>Adjusted</em> Earnings Attributable to Holders of Common Stock $1,160,000
<u><em>Adjusted</em></u><u> Weighted Average Number of Common Stock Holders Calculation</u>
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)
<em>Adjusted</em> 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.
