Question

The information below pertains to Cheyenne Company for 2021. $1,140,000 2,010,000 Net income for the year 6% convertible bonds issued at par ($1,000 per bond); each bond is convertible into 30 shares of common stock 6% convertible, cumulative preferred stock, $100 par value; each share is convertible into 3 shares of common stock Common stock, $10 par value Tax rate for 2021 Average market price of common stock 3,820,000 5,820,000 20% $25 per share There were no changes during 2021 in the number of common shares, preferred shares, or convertible bonds outstanding. There is no treasury stock. The company also has common stock options (granted in a prior year) to purchase 77,900 shares of common stock at $20 per share. (a) Compute basic earnings per share for 2021. (Round answer to 2 decimal places, eg. $2.55.) Basic earnings per share $ 1.96 (b) Compute diluted earnings per share for 2021. (Round answer to 2 decimal places, e.g. $2.55.) Diluted earnings per share $ 1.73

Answer 1

Net Income	11,40,000
6% Convertible bonds $ 1000 per bond convertible into 30 shares of common stock	20,10,000
No. of Convertible bonds	2,010
No.of Common stock   after conversion           =	2010*30
No.of Common stock   after conversion           =	60,300
6% Cummulative preference shares $ 100 each convertible into 3 shares of common stock	38,20,000
No. of Cummulative preference shares	38,200
No.of Common stock   after conversion           =	38200*3
No.of Common stock   after conversion           =	1,14,600
Common Stock $ 10 per share	58,20,000
No of Equity shares	5,82,000
Tax rate	20.00%
a)
Basic Earnings per share     =	Net income available to equity share holders/No.of equity shares
	1140000/582000
Basic Earnings per share     =	1.96
b)
Diluted Earnings per share     =	Net income available to shares after conversion/No.of shares after conversion
Net income available to shares after conversion =
Net income before tax	11,40,000
Interest on preference stock	2,29,200
	13,69,200
Net income before tax	17,11,500
Interest on bonds	2010000*6%
Interest on bonds	1,20,600
Interest on preference stock	3820000*6%
	2,29,200
Netincome before considering interest on bonds	1711500+120600
	18,32,100
Net income available to shares after conversion =	1832100-20%(1832100)(tax)
	14,65,680
No.of shares after conversion =	No.of original shares+No.of shares for conversion of bonds +No.of shares for conversion of preference shares
	582000+60300+114600+90314
	8,47,214
Diluted Earnings per share     =	1465680/847214
	1.73