n January 1, 2010, Warren Corporation had 500,000 shares of common stock outs ta

Question

n January 1, 2010, Warren Corporation had 500,000 shares of common stock outs tanding. On March 1, the corporation issued 100,000 new shares to raise additional capttal. On July 1, the corporation declared and issued a 3-for-1 stock spit. On October 1, the corporation purchased on the market 300,000 of its own outstanding shares and retired them. On November 1 a 5% stock dividend was issued lude reajuy 18.000sharesto 3%,00commonsharemulati divider erwere declared and paid for the .. . 18,000 shares of 7%, S 100 par value, cumulative, preferred stock were outstanding. (convertible into 30,000 common shares). No dividends were deciared and paid for the Inc w inC year 2010 Net income for 2010 was $3.300,000. Tax rate was 35%. . e Bonds, 8%, $400,000 face smount, convertible into 40,000 common shares. Required: 1) Determine Basic Earnings Per Share for 2010 2) Determine the Diluted Earnings Per Share for 2010 4 Carndor appreach

Explanation / Answer

Formula sheet

A B C D E F G H I J K L M 2 3 1) 4 Calculation of Basic EPS: 5 Basic EPS can be calculated using following formula: 6 7 Basic EPS =( Net Income - Preferred Dividends)/Weighted average of common shares during the period 8 9 Weighted average common shares can be calculated by taking into account the number of share for a certain period as follows: 10 11 Change in Number of Shares Outstanding Shares 12 Common Shares outstanding, 1/1/2010                          500,000 13 Number of common shares Issued, 3/1/2010                             100,000                          600,000 14 3 in 1 Split, 7/1/2010                         1,200,000                      1,800,000 15 Treasury Stock Bought and retired, 10/1/2010                           (300,000)                      1,500,000 16 5% Stock Dividends,11/1/2010                               75,000                      1,575,000 17 18 19 20 Date Total Number of Shares Outstanding 21 1/1/2010                             500,000 22 3/1/2010                             600,000 23 7/1/2010                         1,800,000 24 10/1/2010                         1,500,000 25 11/1/2010                         1,575,000 26 27 28 Calculation of weighted average number of shares: 29 30 Number of shares Period (Month) Total Period (Month) Weight Number of shares outstanding * Weight 31                                                                                        500,000 2 12 0.17 83,333.33 32                                                                                        600,000 4 12 0.33 200,000.00 33                                                                                    1,800,000 3 12 0.25 450,000.00 34                                                                                    1,500,000 1 12 0.08 125,000.00 35                                                                                    1,575,000 2 12 0.17 262,500.00 36 Total 1,120,833.33 =SUM(G31:G35) 37 38 Hence weighted average number of shares for basic EPS calculation                         1,120,833 39 40 Calculation of Preferred dividends paid in 2010: 41 42 Par Value $100 43 Dividend 7.00% 44 Annual Dividend per share $7.00 45 46 Number of Preferred shares outstanding 18000 47 48 Preferred Dividends =Number of Preferred dividends*Annual Dividend Per Share 49 $126,000.00 =D46*D44 50 51 Basic Earning per share is calculated as follows: 52 Basic EPS =( Net Income - Preferred Dividends)/Weighted average of common shares during the period 53 54 Net income for 2010 $3,300,000.00 55 Preferred Dividend $126,000.00 56 Wighted Number of Common Shares 1,120,833.33 57 58 Basic EPS =( Net Income - Preferred Dividends)/Weighted average of common shares during the period 59 $2.83 =(D54-D55)/D56 60 61 Hence Basic EPS for 2010 is $2.83 62 2) 63 Diluted Earning per share is calculated as follows: 64 Diluted EPS =(Income Available to Common Shaeholders + After-tax Interest on convertible debt+ Dividend on Convertible Preferred Stock) 65 /(Weighted average of common shares + All dilutive potential common Stock) 66 Given the following data: 67 Net Income $3,300,000 68 Weighted average of common shares                         1,120,833 69 Dividends per preferred shares $7 70 Number of preferred shares                               18,000 71 Preferred Dividends $126,000.00 72 Income available to common shareholders $3,174,000.00 73 74 Convertible Bonds value $400,000.00 75 Interest rate on convertible bond 8% 76 Interest expense on convertible bonds $32,000.00 77 Tax rate 35% 78 After Tax interest expense $20,800.00 =D76*(1-D77) 79 Dividends on convertible preferred common stock $126,000.00 80 81 Dilutive common stocks from Preferred Stocks                               30,000 82 Dilutive common stocks from Convertible bonds                               40,000 83 Total Dilutive potential common shares                               70,000 84 Weighted average of common shares during the period                         1,120,833 85 86 Using the above data dilutive EPS can be calculated as follows: 87 Diluted EPS =(Income Available to Common Shareholders + After-tax Interest on convertible debt+ Dividend on Convertible Preferred Stock) 88 /(Weighted average of common shares + All dilutive potential common Stock) 89 $                                2.79 =(D72+D78+D79)/(D84+D83) 90 91 Hence Diluted EPS is $                                2.79 92

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