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    Compute Basic EPS and Diluted EPS for Clause Company

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    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.


    ( 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

    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

    Diluted earnings per share = Formula shares

    Diluted earnings per share = Formula per share

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    Solution Summary

    Your tutorial is in Excel (attached). Click in cells to see computations.

    Notes are given to show you the anti-dilutive security so you can ignore that one and adjust only for the other two in the diluted earnings per share.