Hanson Co. had 200,000 shares of common stock, 20,000 shares of convertible pref

Question

Hanson Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $1,000,000 of 10% convertible bonds outstanding during 2011. The preferred stock is convertible into 40,000 shares of common stock. During 2011, Hanson paid dividends of $1.20 per share on the common stock and $4 per share on the preferred stock. Each $1,000 bond is
convertible into 45 shares of common stock. The net income for 2011 was $800,000 and the income tax rate was 30%.

What is the basic earnings per share for 2011 is (rounded to the nearest cent)
A) $2.94.
B) $3.22.
C) $3.35.
D) $3.60.


What is the diluted earnings per share for 2011 is (rounded to the nearest cent)
A) $2.77.
B) $2.81.
C) $3.05.
D) $3.33.

Explanation / Answer

Answer is D). $3.60 Earning per share: Earning per share can be calculated as follows; Earning per share = Earning after preference dividends / Number of common shares outstanding Here, preference share holders dividends = 10% of $800,000 Preference share holders dividends          = 80,000 So earnings after pref dividend                 = $720,000 Number of common shares outstanding    = 200,000 So earning per share                                = 720,000 / 200,000 Earning per share                                     = $3.60 Answer: A $2.77
Diluted earning per share: Diluted earning per share is nothing but the earning per share after the conversion of all convertible securities. So convertible preference shares (20,000) = 40,000 common stock Convrtible bonds ($1,000,000) each $1,000 into 45 common stock = 45,000 common stock So total converted common shares            = 85,000 Existed common stock                              = 200,000 Total outstanding common stock               = 285,000 Diluted earning per share = Earning after preference dividends / Number of common shares outstanding                                        = 720,000 / 285,000 Diluted earning per share = $2.6 nearer to $2.77

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