Question

III. Earnings Per Share. Given the following financial structure for Company S for all of 2016:

Common stock, $1 par value, 800,000 shares issued and outstanding all year.

Convertible preferred stock, 50,000 shares, $100 par value, 6% cumulative dividend, each share convertible into 5 shares of common stock.

Convertible bonds, $500,000 face value, 8% stated rate, each $1,000 bond is convertible into 20 shares of common stock.

Stock options, 100,000 options outstanding, each option convertible for one share of stock at an option price of $60 per share.

Additional information:

1.   The convertible bonds were issued at par in 2015.

2.   The average market price per share for the common stock was $80 for the year.

3.   The income tax rate for Company S is 30 percent.

4.   Net income for Company S for 2016 was $$2,600,000.

A. On the answer sheet, calculate Basic EPS (carry calculations to 2 decimal places).

B. On the answer sheet, show your calculations for the numerator and denominator effect of each of the above convertible securities. (This part of the answer sheet will allow me to give partial credit, even if you result is wrong.)

C. From your calculations in Part B, complete the schedule to calculate the dilution index of each convertible security, then indicate the ranking (most dilutive = 1) of each convertible security.

D. Using the indexes above to incrementally evaluate the dilutive effect, calculate diluted earnings per share in the space provided on the answer sheet. Show the DEPS calculation at each incremental stage and carry the calculation to 2 decimal places. CIRCLE the DEPS number that would be displayed in the financials.

III. Journal Entries

A. Convertible Bonds:

B. Convertible Preferred Stock:

C. Stock Options

      (1) December 30, 2014

      (2) December 31, 2015

      (3) January 1, 2017:

      (4) January 1, 2018

III. D. Restricted Stock

      (1) December 31, 2014

      (2) December 31, 2015

     (3) January 1, 2016

     (4) December 31, 2016 (remaining expense and transfer to CS)

III. EPS Calculations

A. Basic EPS (show calculations):

B. Calculations for Diluted EPS (numerator and denominator effect) – show your work for the numerator and denominator calculations and carry to Part C.

         (1) Stock options:

                  Numerator:____________________________________________

                  Denominator: __________________________________________

         (2) Convertible bonds:

                  Numerator: ____________________________________________

                  Denominator: __________________________________________

         (3) Convertible preferred stock:

                  Numerator: ____________________________________________

                  Denominator: ___________________________________________

         C.     Using your results in Part B, complete the schedule below to rank the convertible securities:             

                                                Numerator       Denominator      Index            Ranking

Stock options                          ________        _________     ________       ________       

Convertible bonds                  ________        _________     ________       ________

Convertible preferred              ________        _________     ________       ________

4. From your rankings in Part C, show the incremental calculation of Diluted EPS, with the resulting DEPS number at each stage (CIRCLE the number that would be displayed in the financials for DEPS.

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Answer 1