Question

Selected financial data for ABC Company is presented below.
- For the year just ended ABC has net income of: $5,300,000.
- In the prior year, $5,500,000 of 7% convertible bonds were issued at a face amount of $1,000. Each bond is convertible into 50 shares of common stock. No bonds were converted during the current year.
- In the prior year, 50,000 shares of 10% cumulative preferred stock, par value $100, were issued. Preferred dividends were not declared in the current year but were current at the end of the prior year.
- At the beginning of the current year, 1,060,000 shares of common stock were outstanding.
- On June 1 of the current year, 60,000 shares of common stock were issued and sold.
- ABC’s average income tax rate is 40%.

ABC Company’s basic earnings per share (BEPS) for the current fiscal year is

Answer 1

Answer:

$4.38 per stock

Explanation:

first we must determine the total amount of outstanding stock:

• 1,060,000 stocks at the beginning of the year
• 60,000 more stocks issued on June 1 which are equivalent to: (7/12) x 60,000 = 35,000 full year stocks

The formula for calculating basic earnings per share = (net income - referred dividends) / weighted average stocks outstanding

basic earnings per share = [$5,300,000 - (50,000 x 10% x $100)] / (1,060,000 + 35,000) = ($5,300,000 - $500,000) / 1,095,000 = $4,800,000 / 1,095,000 = $4.38 per stock