Question

Problem 16-08

The information below pertains to Novak Company for 2021.

Net income for the year		$1,220,000
7% convertible bonds issued at par ($1,000 per bond); each bond is convertible into     30 shares of common stock		1,990,000
6% convertible, cumulative preferred stock, $100 par value; each share is convertible      into 3 shares of common stock		3,990,000
Common stock, $10 par value		6,140,000
Tax rate for 2021		20%
Average market price of common stock		$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 70,900 shares of common stock at $20 per share.

(a) Compute basic earnings per share for 2021. (Round answer to 2 decimal places, e.g. $2.55.)

Basic earnings per share

$

(b) Compute diluted earnings per share for 2021. (Round answer to 2 decimal places, e.g. $2.55.)

Diluted earnings per share

$

Answer 1

The answer has been presented in the supporting sheet. All the parts has been solved with detailed explanation and calculation. For detailed answer refer to the supporting sheet.

А в со Answer 2 Part 1) 3 Basic earning per share 4 = (Net income - preference dividend / no. of equity shares 5 = (1220000-(3990000*6%)/(6140000/10) 6 = ( 1220000 - 239400)/614000 7 = $ 1.6 8 Thus the correct answer Diluted earning per share = $ 1.6 10 Diluted earning per share = (Net Income + interest expense after tax )/(no. of equity shares + convertible preference shares into equity + equity shares from bond coversion + stock option equity shares) 12 = (1220000+((1990000*7%)*80%))/(614000+(3990000/100)*3)+((1990000/1000) *30) +14180) 73 = ( 1220000+111440)/(614000+119700+59700+14180) 14 = $ 1.65 75 Thus the correct answer diluted earning per share = $ 1.65 17 Note 78 No. of equity shares to be considered for diluted earning per share 19 =no. of stock options - (no. of options * exercise price) / market price) 20 = 70900-(70900*20)/25) 21 = 14180 shares