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EPS, tax rate and Dividends - Reel Envy Corp, Gold Reel

Reel Envy Corporation

The Controller of Reel Envy (registered trademark) Corporation has given you the responsibility of calculating the earnings per share figures for the year ended 12-31-08. The information provided to you discloses the following:

1. Common stock at 1-1-08, stated value $2, authorized 5,000,000 shares; effective 10-1-08, stated value $1, authorized 10,000,000 shares.
- Balance, 1-1-08, issued and outstanding 500,000 shares
- 10-1-08, 500,000 shares issued in a 2 for 1 split
- 12-1-08, 480,000 shares issued at $52 per share
- 12-31-08, 750,000 shares issued to acquire Gold Reel Corporation in a business combination. Gold Reel had 1,500,000 shares outstanding for the entire year of 1908.

2. Treasury stock transactions:
3-31-08 purchased 50,000 shares at $110 per share
7-1-08 sold 50,000 shares at $115 per share.

3. Stock purchase warrants, Series A - initially each warrant was exchangeable with $100 for one common share; effective 10-1-08, each warrant became exchangeable for two common shares at $50 per share:
1-1-08, 55,000 warrants issued at $10 each.

4. Stock purchase warrants, Series B - initially each warrant was exchangeable with $125 for one common share; effective 10-1-08, each warrant became exchangeable for two common shares:
9-1-08, 40,000 warrants issued at $12 each.

5. First mortgage bonds, 8%, due 2030, nonconvertible, priced to yield 7.5% at date of issue:
Balance 1-1-08, authorized, issued and outstanding at a face value of $2,000,000.

6. Convertible debentures, 6%, due 2020, initially each $1,000 bond was convertible into 8 common shares; effective 10-1-08, the conversion rate became 16 shares per bond:
1-1-08, $2,000,000 bonds were authorized and issued at face value.

7. $4 cumulative convertible preferred stock, each share convertible into two shares of common, $40 par, 2,000,000 shares authorized:
10-1-08, 1,000,000 shares issued at $100 per share.

8. Stock options were granted to officers and key employees to purchase 110,000 shares of common stock at $48 per share, exercisable 1-1-10:
10-1-08 granted options to purchase 110,000 shares.

9. Summary of market prices and bank rates:
Price or Rate on a Date Yearly Average
1-1-08 4-1-08 7-1-08 10-1-08 12-31-08 12-31-08
Common Stock 100 110 115 52 60 55*
Preferred Stock 100 95 97
First Mortgage Bends 100.5 98 96 95 93 96
Convert Debentures 100 100 95 93 92 95
Series A 10 12 15 14 11 12
Series B 12 10 10.5
Aa Bond Rate 8 8.2 9.5 10 9.3
*Adjusted for stock split

Required:

Calculate the earnings per share assuming a net income of $3,500,700 for Reel Envy Corporation and $1,512,000 for Gold Reel Corporation. The effective tax rate for both corporations is 30%. Dividends paid to preferred stockholders in 2008 amounted to $250,000.

Solution Preview

Your tutorial is attached in Excel. I compute the basic EPS first. Then, I give ...

Solution Summary

Your tutorial is attached in Excel. I compute the basic EPS first. Then, I give you the rule and work each security individually to see if it has a dilutive effect or not. This is an example of convertible securities, warrants, and stock options. The treasury shares method is shown for you. Finally, the diluted EPS is computed.

$2.19