3. At the end of 2018, Isabelle Joy, Co. gathered the following information in p

Question

3. At the end of 2018, Isabelle Joy, Co. gathered the following information in preparatiorn for calculating earnings per share to present on their audited financial statements: 220,000 outstanding shares of common stock at 1/1 Convertible preferred stock (132,000 preferred shares which are convertible into 70,400 common shares) Convertible bonds totaling $1,980,000, 1090, convertible into 29,700 common shares Executive stock options granted in 2010, and exercisable after 2017 for 56,000 common shares with an exercise price of $15 per share . . . . .Average market price of a common share during the year was $12 . Net income was $1,144,000 . Tax rate is 30% . The company paid preferred dividends totaling $1.50 per each share of preferred stock Required: Calculate both basic and diluted EPS for the year ended December 31,2018. Consider possible antidilutive effects of the outstanding securities by calculating the incremental effect of each potentially dilutive security and then follow the "order of entry" to find EPS

Explanation / Answer

Basic EPS at the end of the year = (Net Income - Preferred Dividend)/ Shares o/s

=($1144000-$198000)/220000= $4.30 per share

Calculation of no. of diluted shares in case of options = 56000*$15/$12 = 70000 shares

Additional shares diluted = 14000 shares

Diluted EPS = (Net Income + After tax interest on bonds)/ Total no. of shares including conversion

=($1144000+($198000*.7))/(220000+70400+29700+14000)

=$1282600/334100

$3.83 per share

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