Question

1. Earnings Per Share Calculations (22 points) Curse of the Bambino Entertainment (CotBE) had the following securities outstanding and other information for 2017: Preferred Stock: Issue A Preferred Stock, cumulative and nonconvertible, 3.5%, $100 par: Dividend payments are in arrears for three (3) years. $1,000,000 $5,000,000 Issue B Preferred Stock, non-cumulative and convertible, 4%, $100 par Conversion rate is 3.5 common shares for every preferred share. Common Stock: Class A Common Stock, $1 par, 5,000,000 shares authorized, 1,000,000 shares issued and outstanding at January 1, 2017 $1,000,000 Issued 60.000 shares on March 1, 2017 Repurchased 90,000 shares on April 1, 2017 Repurchased 50,000 shares on July 1, 2017 Sold 100,000 of repurchased (treasury) shares on October 1, 2017 Stock Warrants - warrants are exchangeable for 100,000 common shares. The warrants were issued on October 1, 2016 and have a $15 exercise price per warrant. Stock Options - CotBE's issued 90,000 stock options to key executives on January 1, 2017 which vest on December 31, 2019 and have an exercise price of $18 per option. Convertible Bonds - 3% Convertible Bonds of $5,000,000 were sold at par value on July 1, 2017. Each $1,000 of bond is convertible into 100 shares of common stock. Other Information: Net Income for 2017 was $1,500,000 Income Tax Rate was 25% for 2017 CotBE's declared and paid a cash dividend of $100.000 on common stock during 2017 The average market price per common share during 2017 was $21. Required - Calculate CotBE's Basic and Diluted EPS for the year ended December 31, 2017, show all calculations.

Answer 1

|(Net Income - Preferred Dividends) Basic EPS divided by Weighted Average Number of Outstanding Common Shares (Net Income- Preferred Dividends) +Convertible Preferred Dividends + Convertible debt Interest (after tax) Diluted EPS divided by Weighted Average Number of Outstanding Common Shares + Diluted Shares

Weighted Average Number of Outstanding Common Shares:

Portion of Weighted No. of shares Date Average Shares year 12/12 1-Jan-17 1,000,000 1,000,000 10/12 50,000 1-Mar-17 60,000 9/12 (90,000) (67,500) 1-Apr-17 6/12 1-Jul-17 (50,000) (25,000) 3/12 1-Oct-17 100,000 25,000 31-Dec-17 1,020,000 982,500

Stock Calculation options Diluted Shares Calculation warrants Warrants Options 100,000 $15 Amount to be paid Value at market price 90,000*18 1,500,000 1,620,000 1,620,000 $21 100,000 77,142.86 1,500,000/ $21 71,428.57 77,142.86 100,000 71,428.57 Diluted Shares 28,571.43 22,857.14

We have to calculate the number of shares in stock options that would have been bought if purchased at market price instead of exercise price.

So we can arrive at dilution in stocks due to warrants, so out of 100,000 shares, we could have got 71,428.57 shares at market price & remaining 28,571.43 is diluted shares.

No. of shares Calculation Convertible Preferred Stock 5,000,000/ 100 * 3.5 175,000 5,000,000 1000 * 100 shares * 6/12 months 5,000,000*3%*(1-25%)* 6/12 Convertible Debt- 1st July 250,000 Convertible Debt - Interest savings 56,250

Basic EPS Solution Calculation 1,500,000 - (1,000,000* 3.5%) Numerator 1,465,000 Denominator From above table 982,500 Basic EPS 1.49 per share

Diluted EPS 1,500,000 (1,000,000 *3.5%)+ (5,000,000 *3.5%) Numerator (5,000,000 3.5%*(1-25%) *6/12 1,705,625 Denominator 1,458,928.57 982,500 175,000 250,000 28,571.43 +22,857.14 Diluted EPS 1.17 per share