Question

Donald Corporation had 7 million shares of common stock outstanding during the current calendar year. It issued ten thousand $1,000, convertible bonds on January 1. Each bond is convertible into 50 shares of common stock. The bonds were issued at face amount and pay interest semiannually at an annual rate of 10%. On June 30, Ignatius issued 100,000 shares of $100 par 6% cumulative preferred stock. Dividends are declared and paid quarterly. Ignatius has an effective tax rate of 25%. Ignatius would report the following EPS data (rounded) on its net income of $20 million: Basic EPS Diluted EPS a. $ 2.77 $ 2.67 b. $ 2.81 $ 2.73 c. $ 2.85 $ 2.67 d. $ 2.81 $ 2.68 A. Option A B. Option B C. Option C D. Option D

Answer 1

The EPS data that would be reported on its net income of $20 million are A. Option A.

What is earnings per share (EPS)?

Earnings per share is the net income divided by the number of outstanding shares.

The EPS can be represented as either basic or diluted.  Diluted EPS shows the net income divided by the number of outstanding shares including the number of convertible instruments.

Data and Calculations:

January 1

Number of common shares outstanding = 7 million

Convertible bonds issued = $10 million (10,000 at $1,000)

Conversion ratio = 1:50

Bond's annual interest rate = 10%

Bonds' interest = $1 million ($10 million x 10%)

Convertible bonds into shares = 500,000 (10,000 x 50)

June 30:

6% Cumulate Preferred Stock, 100,00 shares at $100 = $10 million

Effective tax rate = 25%

Net income = $20 million

Cumulative Preferred dividend = $600,000 ($10 million x 6%)

Profit after Cumulative Preferred dividend = $19.4 million ($10,000,000 - $600,000)

Earnings Per Share:

Basic EPS = $2.77 ($19.4 million/7 million shares)

Diluted EPS = $2.59 ($19.4 million/7.5 million shares)

Thus, the EPS data that would be reported on its net income of $20 million are A. Option A.

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