This is all of the information . I am having trouble with this. I know the Issue

Question

This is all of the information. I am having trouble with this. I know the Issued sharesof common stock have to be added to the 80,000 outstanding shares as well as the Coverted Share of common stock. I am confused on how to calculated the months/12 to get the correct weighted average. For instance, Jan.1st 800,000 Outstanding shares*$10per share= $8,000,000 May1 issued 50,000 shares*$30per shares =1,500, Aug1.Purchased 100,000shares for $35per share=$3,500,000 Now for Oct1, is where I get confused. Please help. This is for Financial Accounting II, Thank you,

Explanation / Answer

Calculation of weighted average no of shares for EPS, beginning shares were there fore 12 months, new shares issued were there for 8 months, treasury stock purchased for 5 months, bonds converted when 3 months were remaining

= 80000 * 12/12 + 50000 * 8/12 - 100000 * 5/12 + ($2000000/$10000) * 80 shares per bond * 3/12

Therefore, weighted average no of shares = 80000+33333-41667+40000 = 111666 shares

It is assumed that Net income given in question is after deducting proper interest on bond i.e. for 9 months on $2000000 and for 12 months on $3000000

Net income after tax= 950000 * 70% = $665000

therefore basic EPS = 665000/111666 = 5.96 per share

For, diluted EPS Weighted average no of shares would be increased by if $3000000 bond would have been converted into shares i.e. [111666 + ($3000000/$1000) * 80 shares per bond] = 351666 shares

Interest on $3000000 bond = $330000

Also NPAT would have to be recomputed since if bonds are not there interest would not have been incurred

Therefore, NPAT for diluted EPS = [950000+330000]*30% = $896000

Diluted EPS = 896000/351666 = $2.55 per share

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