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Basic/Diluted Earnings per Share

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I am having some difficulty with this problem. I would really appreciate the assistance when you get the chance. Thank you in advance for taking the time to review my post.

The following information is presented for Make Believe Company.

1. In the year 2000, 800,000 shares of $10 par value common stock were issued for $9 million.

2. In the year 2000, 100,000 shares of 9% preferred stock were issued at par for $6 million. The preferred stock is cumulative, but non-participating.

3. Also in the year 2000, $6 million of 20 year, 8% convertible bonds were issued at par. Each $1,000 is convertible into 80 shares of 10 par value common stock. None of the bonds have been converted to date.

4. On April 1, 2001 (this year), an additional 400,000 shares of $10 par value common stock was issued for $5 million.

5. No dividends have been declared in either 2000 or 2001.

6. Net income reported for the year 2001 totaled $1,550,000. The tax rate is 40%.


1. Calculate basic earnings per share.

2. Calculate diluted earnings per share.

Show all calculations including weighted average number of shares outstanding and diluted net income.

Solution Preview

1. Calculate basic earnings per share.

Since the preferred stock is cumulative, even if no dividends are declared, the preferred dividends would be reduced from the net income to calculate the basic earnings per share
Basic Earnings per share = (Net Income - Preferred Dividends)/Weighted average common shares outstanding
We first calculate the ...

Solution Summary

The solution explains the calculation of basic and diluted earnings per share