Help with earnings per share and diluted EPS?

Question

I think I figured the basic EPS, but I'm not sure about the diluted:

Net income 3,100,000 (30% tax rate)

1,000,000 average common shares outstanding

10% cumulative convertible preferred stock

convertible into 80,000 shares of common (1,600,000)

8% convertible bonds, convertible into 75,000 shares of common (2,500,000)

Stock options, exercisable at the option price of $20 per share, average market price, $25 100,000 shares

Thanks

Answer 1

Diluted Earnings Per Share (diluted EPS) is a company's earnings per share (EPS) calculated using fully diluted shares outstanding (i.e. including the impact of stock option grants and convertible bonds). Diluted EPS indicates a "worst case" scenario, one in which everyone who could have received stock without purchasing it directly for the full market value did so.[1]

To find diluted EPS, basic EPS is calculated for each of the categories on the income statement first. Then each of the dilutive securities are ranked based on their effects, from most dilutive to least dilutive and antidilutive. Then the basic EPS number is diluted one by one by applying each one, skipping any instruments that have an antidilutive effect.[2]

Net income 3,100,000 (30% tax rate)

1,000,000 average common shares outstanding

10% cumulative convertible preferred stock

convertible into 80,000 shares of common (1,600,000) ($20 par)

8% convertible bonds, convertible into 75,000 shares of common (2,500,000) ($33.33 par)

Stock options, exercisable at the option price of $20 per share, average market price, $25 100,000 shares

Preferred stock dividends:

10% ($20 par) preferred stock

       = ($20 par x 10%) x 80,000 shares

       = $2.00 x 80,000 shares = $160,000

Income available for common stockholders

= $3,100,000 - $160,000 = $2,940,000

For Basic EPS,

--> Income available for common stockholders

= Net income - all preferred stock dividends

Weighted average number of common shares: 1,000,000

Basic EPS = $2,940,000 / 1,000,000 shares = $2.94

If convertible preferred stocks are converted:

a. Incremental shares:

--> 80,000 shares

b. Weighted average number of common shares:

--> 1,000,000 shares + 80,000 shares = 1,080,000 shares

c. Dividends on convertible preferred stock:

--> 10% ($20 par) preferred stock:

= ($20 par x 10%) x 80,000 shares

= $2.00 x 80,000 shares = $160,000

d. Income available to common stockholders:

--> $2,940,000 + $160,000 = $3,100,000

For Diluted EPS (If-method method)

--> Income available for common stockholders for Diluted EPS

= Income available for common stockholders for Basic EPS

+ Dividends on convertible preferred stock

Diluted EPS = $3,100,000 / 1,080,000 shares = $2.87

If convertible bonds are converted:

a. Incremental shares:

75000 shares =

b. Weighted average number of common shares:

--> 1,000,000 shares x 3/12 = 250,000 shares

      1,075,000 shares x 9/12 = 806,250 shares

                                   Total = 1,056,250 shares

c. Interest expense:

--> $2,500,000 x 8%  = $200,000

--> After tax: $200,000 x (1 - 30%) = $140,000

d. Income available to common stockholders:

--> $3,100,000 + $140,000 = $3,240,000

Diluted EPS = $3,240,000 / 1,056,250 shares = $3.07

Convertible preferred stock or convertible debt

--> assumed to be converted

at the beginning of period or

at the time of issuance, whichever is later.

Stock options, exercisable at the option price of $20 per share, average market price, $25 100,000 shares

Incremental shares from stock options:

a. Proceeds from assumed exercise:

--> April 1, 2006: 100,000 shares x $20 = $2,000,000

b. Number of shares assumed to be repurchased:

--> $2,000,000 / $25 = 80,000 shares

c. Incremental shares from assumed exercise:

--> Incremental shares = 100,000 shares - 80,000 shares = 20,000 shares

Alternatively,

100,000 shares - [(100,000 shares x $20 ) / $25

= 100,000 shares x (1 - $20/$25)

= 100,000 shares x ($25/$25 - $20/$25)

= 100,000 shares x [($25 - $20) / $25]

= 100,000 shares x .20 = 20,000 shares

Option shares x [(Average market price - Exercise price) / Average market price]

Diluted EPS = $3,100,000/1,020,000 shares = $3.04

Total Diluted EPS

= $3,100,000 + $140,000 /1,000,000 + 20,000 + 56,250 + 80,000

=  $3,240,000/1,156,250 total shares

= $2.80

I think I did it right...?   Thanks for the question!  I learned something, even if I got it wrong....lol