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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.


( 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


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.