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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.

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

Attachments
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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.

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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