Zeller Corporation began 2013 with 120,000 shares of common stock and 16,000 sha

Question

Zeller Corporation began 2013 with 120,000 shares of common stock and 16,000 shares of convertible preferred stock outstanding. On March 1 an additional 10,000 shares of common stock were issued. On August 1, another 16,000 shares of common stock were issued. On November 1, 6,000 shares of common stock were acquired for the treasury. The preferred stock has a $2 per-share dividend rate, and each share may be converted into one share of common stock. Zeller Corporation’s 2013 net income is $501,000.

a. Compute basic earnings per share for 2013. Round to two decimal places.

b. Compute diluted earnings per share for 2013. Round to two decimal places.

Explanation / Answer

Part A)

We will have to calculate the weighted average shares outstanding at the end of 2013 to calculate EPS. The weighted average shar outstanding es have been calculated with the use of following table:

The EPS can be calculated with the use of following formula:

Basic EPS = (Net Income - Preferred Dividend)/Weighted Average Outstanding Shares

Basic EPS for 2013 = (501,000 - 16,000*2)/134,000 = $3.50 per share

_________

Part B)

The Diluted EPS can be calculated with the use of following formula:

Diluted EPS = Net Income/(Weighted Average Shares Outstanding + Shares from Conversion of Convertible Preferred Stock)

Using the information provided in the question, we get,

Diluted EPS for 2013 = 501,000/(134,000 + 16,000) = $3.34 [each share of preferred stock will get converted for 1 share of common stock resulting in additional 16,000 shares]

Date Outstanding Shares (A) Months for which Shares Remain Outstanding (B) Total Months (C) Weighted Shares (A*B/C) 1st Jan 120,000 2 (1st Jan to 28th Feb) 12 20,000.00 1st Mar 130,000 (!120,000 + 10,000) 5 (1st Mar to 31st Jul) 12 54,166.67 1st Aug 146,000 (130,000 + 16,000) 3 (1st Aug to 30th Oct) 12 36,500.00 1st Nov 140,000 (146,000 - 6,000] 2 (1st Nov to 31st Dec) 12 23,333.33 31stDec 134,000 Shares

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