Question

Alciatore Company reported a net income of $150,000 in 2018. The weighted-average number of common shares outstanding for 2018 was 40,000. The average stock price for 2018 was $33. Assume an income tax rate of 40%. Required: For each of the following independent situations, indicate whether the effect of the security is antidilutive for diluted EPS.

Alciatore Company reported a net income of $150,000 in 2018. The weighted-average number of common shares outstanding for 2018 was 40,000. The average stock price for 2018 was $33. Assume an income tax rate of 40%. Required: For each of the following independent situations, indicate whether the effect of the security is antidilutive for diluted EPS. | 10,000 shares of 7.7% of $100 par convertible, cumulative preferred stock. Each share may be converted into two common shares. 18% convertible 10-year, $500,000 of bonds, issued at face value. The bonds are convertible to 5,000 shares of common stock. 3. Stock options exercisable at $30 per share after January 1, 2018 4. Warrants for 1,000 common shares with an exercise price of $35 per share.

Answer 1

ANSWER:-

Part (1):- 10,000 shares of 7.7% of $100 par convertible cumulative preferred stock Each share be converted into two common shares

preferred dividend = (77,000[(7.7% * %100) * 10,000]

Converted shares = 2 * 10,000

=20,000

Conversion ratio for preferred stock = $(77,000 / 20,000)

=$3.85

Basic EPS =$(150,000 - 77,000) / 40,000

=$73,000 / 40,000

=$1.825

Preferred stock is anti dilutive since $8.35 not less than $1.825

part(2):- 8% convertible 10 year, $500,000 bonds, issed at face value

The bonds are convertible into 5,000 shares of common stock

After tax Interest on conversion = [ (8% * 500,000) * 60%]

=$24,000

Converted shares = 5,000

Conversion ratio for convertible bonds =$(24,000 / 5,000)

=$4.80

Basic EPS = $(150,000 / 40,000)

= $3.75

Bond is anti dilutive since $4.80 is not less than $3.75

Part (3):- stock options exercisable at $30 per share after January 1 ,2020

Exercise price = $30

and Market price =$33

Stock options are dilutive since the exercise price of $30 per share is less than the market price of $33 per share.

Part (4):- Warrants for 1,000 common shares with an exercise price pf $35 per share .

Exercise price = $35 and Market price = $33

Warrants are anti dilutive since the exercise price $35 per share is not less than the

market price price of $33 per share.

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