At December 31, 2010, Tatum Company had 2,000,000 shares of common stock outstan

Question

At December 31, 2010, Tatum Company had 2,000,000 shares of common stock outstanding. On January 1, 2011, Tatum issued 500,000 shares of preferred stock which were convertible into 1,000,000 shares of common stock. During 2011, Tatum declared and paid $1,500,000 cash dividends on the common stock and $500,000 cash dividends on the preferred stock. Net income for the year ended December 31, 2011, was $5,000,000. Assuming an income tax rate of 30%, what should be diluted earnings per share for the year ended December 31, 2011?

Explanation / Answer

Number of outstanding shares as on December 31, 2010 = 2,000,000 shares Converted preferred stock to common stock = 1,000,000 shares Total Number of outstanding shares as on December 31, 2011 = 3,000,000 shares Diluted Earnings per Share = [(Net Income - Preferred Dividends ) / Number of Outstanding shares] Total Number of Outstanding Shares = [2,000,000 shares + 1,000,000 shares] Total Number of Outstanding shares = 3,000,000 shares Preferred Dividends = $500,000 Net Income = $5,000,000 Diluted Earnings per share = [($5,000,000 - $500,000) / 3,000,000] Diluted Earnings per share = [$4,500,000 / 3,000,000] Diluted Earnings per share = $1.50 Diluted Earnings per share as on December 31, 2011 = $1.50 per share

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