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# Basic Earnings Per Share (EPS)

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An analyst gathered the following information about a company whose fiscal year end is December 31:
• Net income for the year was \$10.5 million.
• Preferred stock dividends for \$2 million were declared and paid for the year.
• Common stock dividends of \$3.5 million were paid for the year.
• There were 20 million shares of common stock outstanding on January 1, 2011.
• The company issued 6 million new shares of common stock on April 1, 2011.
• The capital structure does not include any potentially dilutive convertible securities, options, warrants, or other contingent securities.

What would the company's basic earnings per share be for 2011? Show calculations.

#### Solution Preview

See the attached file.

An analyst gathered the following information about a company whose fiscal year end is December 31:
• Net income for the year was \$10.5 million.
• Preferred stock dividends for \$2 million were declared and paid for the year.
• Common stock dividends of ...

#### Solution Summary

This tutorial shows the student how to calculate basic earnings per share. All calculations are shown.

\$2.19

## Compute Basic EPS and Diluted EPS for Clause Company

See attached Excel sheet for better format.

Please show how you get all calculations.

The information below pertains to Clause Company for 2011.

Net income for the year \$1,200,000

8% convertible bonds issued at par (\$ 1,000 per bond). Each bond is
convertible into 40 shares of common stock. 2,000,000

6% convertible, cumulative preferred stock, \$100 par value.
Each share is convertible into 3 shares of common stock. 3,000,000

Common stock, \$10 par value 6,000,000

Common stock options ( granted in a prior year) to purchase
50,000 shares of common stock at \$20 per share 500,000

Tax rate for 2011 40%

Average market price of common stock \$25 per share
There were no changes during 2011 in the number of common shares,
preferred shares, or convertible bonds outstanding. There is no treasury stock.

Instructions

( a) Compute basic earnings per share for 2011.

( b) Compute diluted earnings per share for 2011.

Net Income - Preferred Dividends
( a) Basic earnings per share = Average Common Shares Outstanding

Formula
Basic earnings per share = Formula shares

Basic earnings per share = Formula per share

Net Income - (1) Preferred Dividends + (2) Interest [net of tax]
( b) Diluted EPS = Ave. Common Shares Outstanding + (3) Potentially Dilutive Shares

Notes: (1) Preferred Dividends = Rate x (Shares Outstanding x Par Value)

Preferred Dividends = Formula

(2) Interest = (interest rate x covertible bonds) x (1 - tax rate)

Interest = Formula

(3) Potentially Dilutive Shares include convertible bonds & stock options:

a. Convertible Bonds = (Principal divided by \$1,000) x 40 shares

Convertible Bonds = Formula shares

b. Stock Options = [(Market Price - Option Price) / Market Price] x option shares

Formula shares

Formula
Diluted earnings per share = Formula shares

Diluted earnings per share = Formula per share

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