Question: Computing Basic & Diluted EPSDuring 2020, ABC Co. had net income of $900,000. The company has 20,000 shares of 5%, $100 par, convertible preferred stock outstanding, and 1,500, 10% convertible bonds outstanding, which were issued at par. The preferred shares and the convertible bonds were issued in 2017. Each share of convertible preferred stock is convertible into 5 shares of common stock. Each bond is convertible into 90 shares of common stock. The company has a tax rate of 21% and a weighted average shares outstanding of 800,000 throughout 2020.Instructions:Compute Basic EPS for 2020Compute Diluted EPS for 2020

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Asked Dec 21, 2019
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Question: Computing Basic & Diluted EPS

During 2020, ABC Co. had net income of $900,000. The company has 20,000 shares of 5%, $100 par, convertible preferred stock outstanding, and 1,500, 10% convertible bonds outstanding, which were issued at par. The preferred shares and the convertible bonds were issued in 2017. Each share of convertible preferred stock is convertible into 5 shares of common stock. Each bond is convertible into 90 shares of common stock. The company has a tax rate of 21% and a weighted average shares outstanding of 800,000 throughout 2020.

Instructions:

  1. Compute Basic EPS for 2020
  2. Compute Diluted EPS for 2020
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Expert Answer

Step 1

1.

The net income is $900,000.

The weighted average shares outstanding is 800,000.

The dividends on preferred stock will be $2,000,000 × 5% = $100,000.

The basic EPS is calculated below:

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Net income – Dividend on preferred stock Basic EPS = Average outstanding $900, 000 – $100, 000 800, 000 = $1

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Step 2

2.

The company will have more amount to distribute when bonds are converted into shares. The interest amount after tax is calculated below:

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Interest amount after tax = Bond value x Interest rate x (1- Tax rate) = 1, 500 x $1,000× 0.10x(1- 0.21) = $118, 500

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Step 3

Each preferred stock is converted into 5 common stock. So, number of stocks added would be 20,000 × 5 = 100,000.

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