Question

On January 1, 2020, Grouper Company issued 10-year, $1,980,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 15 shares of Grouper common stock. Grouper's net income in 2020 was $479,400, and its tax rate was 20%. The company had 102,000 shares of common stock outstanding throughout 2020. None of the bonds were converted in 2020. (a) Compute diluted earnings per share for 2020. (Round answer to 2 decimal places, e.g. $2.55.) Diluted earnings per share $ 4.36 (b) Compute diluted earnings per share for 2020, assuming the same facts as above, except that $1,020,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred share is convertible into 5 shares of Grouper common stock. (Round answer to 2 decimal places, e.g. $2.55.) Diluted earnings per share $ 3.13

Answer 1

In case of preference shares, you would have to consider the profit before preference dividend, since the same would also be available for distribution in case the preference shares were converted.

Thus numerator should be Net income + Preference dividend = 479,400 + (1,020,000 x 6%) = $540,600.

Potential equity shares = 10,200 x 5 common stock each = 51,000.

Denominator should be Shares Outstanding Plus potential shares = 102,000 + 51,000 = 153,000

Thus Diluted EPS = 540,600/153,000 = $ 3.53.

Answer 2

b) Basic earning per share = (479400-61200)/102000 = 4.10

Diluted earning per share = Adjusted net income/Adjusted shares

= 479400/(51000+102000)

Diluted earning per share = 3.13