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    Diluted EPS Tutorial

    Uploaded by

    Rawan Yasser
    The document provides information and calculations for diluted earnings per share (DEPS) for several examples. In the first example, a company issued convertible bonds, and DEPS is calculated as $2.86 by taking adjusted net income and dividing by the total shares which includes original shares plus shares from bond conversions. In the second example, the company issued convertible preferred stock instead of bonds, and DEPS is $2.00 using a similar calculation.

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    Diluted EPS Tutorial

    Uploaded by

    Rawan Yasser
    54 views3 pages
    The document provides information and calculations for diluted earnings per share (DEPS) for several examples. In the first example, a company issued convertible bonds, and DEPS is calculated as $2.86 by taking adjusted net income and dividing by the total shares which includes original shares plus shares from bond conversions. In the second example, the company issued convertible preferred stock instead of bonds, and DEPS is $2.00 using a similar calculation.

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    basic earnings per share to solve for assignments

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    The document provides information and calculations for diluted earnings per share (DEPS) for several examples. In the first example, a company issued convertible bonds, and DEPS is calculated as $2.86 by taking adjusted net income and dividing by the total shares which includes original shares plus shares from bond conversions. In the second example, the company issued convertible preferred stock instead of bonds, and DEPS is $2.00 using a similar calculation.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    54 views3 pages

    Diluted EPS Tutorial

    Uploaded by

    Rawan Yasser
    The document provides information and calculations for diluted earnings per share (DEPS) for several examples. In the first example, a company issued convertible bonds, and DEPS is calculated as $2.86 by taking adjusted net income and dividing by the total shares which includes original shares plus shares from bond conversions. In the second example, the company issued convertible preferred stock instead of bonds, and DEPS is $2.00 using a similar calculation.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    of 3

    Diluted EPS

    E16-25 (EPS with Convertible Bonds and Convertible Preferred Stock)


    On January 1, 2017, Crocker Company issued 10-year, $2,000,000 par value, 6% bonds, at par.
    Each $1,000 bond is convertible into 15 shares of common stock. Net income in 2017 was
    $300,000, and the tax rate was 40%. The company had 100,000 shares of common stock
    outstanding throughout the year.
    Instructions
    (a) Compute diluted EPS for 2017.
    (b) Compute diluted EPS for 2017, assuming the same facts as above, except that $1,000,000
    of 6% noncumulative, convertible preferred stock was issued instead of the bonds. Each
    $100 preferred stock is convertible into 5 shares of common stock. No dividends were
    declared.
    Solution

    EXERCISE 16-25 (10–15 minutes)

    (a) Net income $300,000


    Add: Interest savings (net of tax)
    [$120,000 X (1 – .40)] 72,000
    Adjusted net income $372,000

    $2,000,000 ÷ $1,000 = 2,000 bonds


    X 15
    30,000 shares

    Diluted EPS: $372,000 ÷ (100,000 + 30,000) = $2.86

    EXERCISE 16-25 (Continued)

    (b) Shares outstanding 100,000


    Add: Shares assumed to be issued (10,000* X 5) 50,000
    Shares outstanding adjusted for dilutive securities 150,000

    *$1,000,000 ÷ $100

    Diluted EPS: ($300,000 – $0) ÷ 150,000 = $2.00


    Exercise 2
    A company has 6%, $100 par cumulative preferred stock, convertible into 8 shares of common
    stock. The total par value of the stock is $400,000. The paid-in capital is $700,000 and net
    income is $500,000. The weighted average shares are 400,000.
    Instructions
    Calculate diluted earnings per share.
    Solution
    400,000/100 = 4,000 shares of preferred stock
    Preferred stock dividend = 4,000 X 100 X 6% = 24,000
    Basic EPS = (500,000 – 24,000)/400,000 = $1.19
    Diluted EPS = 500,000/(400,000 + 4,000 X 8) = $1.16

    Exercise 3
    A company has stock options which can be converted into 5,000 shares at $10 per share. The
    average stock price is $16, net income is $500,000, and the weighted average number of shares is
    200,000.
    Instructions
    Calculate basic and diluted earnings per share.
    Solution
    Basic EPS = 500,000/200,000 = $2.5
    Extra shares = 5,000
    5,000 X $10 = 50,000 cash
    50,000/16 = 3,125 shares purchased with cash proceeds
    Net shares in denominator = 201,875
    Diluted EPS = 500,000/201,875 = $2.48
    Exercise 4
    A company has $2,000,000, 4% bonds payable with a $5,000 face value. The bonds are
    convertible into 200 shares each. Net income for the year is $500,000 and the tax rate is 35%.
    The weighted average number of shares outstanding is 400,000.
    Instructions
    Compute earnings per share.
    Solution
    Basic EPS = 500,000/400,000 = $1.25
    $2,000,000/5,000 = 400 bonds
    Interest expense = 2,000,000 X 4% = 80,000
    500,000 + 80,000 X (1-.35) = 552,000
    400,000 + 400 bonds X 200 shares = 480,000
    Diluted EPS = 552,000/480,000 = $1.15

    Exercise 5
    On January 1, 2018, Gnomes ‘R’ Us had 100,000 common shares outstanding. On March 1, the
    firm issued 20,000 common shares. On May 1, the firm repurchased 5,000 common shares. On
    June 1, the firm did a 3-for-2 stock split. On August 1, the firm issued 1,000 new common
    shares. On September 29, the firm did a 10% stock dividend. On December 1, the firm
    repurchased 1,000 common shares. The firm has 10,000 shares of 6%, $5 par value,
    nonconvertible, cumulative preferred stock, and $100,000, 8%, par value convertible bonds.
    Each $1,000 bond is convertible into 50 shares of common stock. The tax rate is 20% and net
    income for the period is $450,000.
    Instructions
    Report earnings per share for the period
    Solution
    Weighted average # common shares = (165,000 X 2/12) + (198,000 X 2/12) + (189,750 X 3/12)
    + (190,850 X 4/12) + (189,850 X 1/12) = 187,375
    Preferred stock dividend = 10,000 X $5 X 6% = $3,000
    BEPS = ($450,000 - $3,000) / 187,375 = $2.39
    Interest saved = $100,000 X 8% X (1 - 0.20) = $6,400
    Conversion = $100,000 / $1,000 = 100 bonds X 50 = 5,000 common shares
    DEPS = ($450,000 - $3,000 + $6,400) / (187,375 + 5,000) = $2.36

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