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XYZ company’s net income for 2014 is $2,500,000. The weighted number of shares outstanding for 2014 were 1,000,000. Additional information about XYZ are as follows:
a. On 1/1/2014, the company granted options to its executives to buy 200,000 shares at $15/share. The average market price of XYZ’s shares during 2014 was $30/share.
b. On 1/1/2013, the company issued $1000 face value, 10% convertible bonds at par for total amount of $500,000. Each bond is convertible into 100 common shares. The bonds were outstanding throughout 2014.

The tax rate for 2014 is 40%

Required:
Calculate Diluted EPS of XYZ for 2014. Show all calculations.

Explanation / Answer

Basic EPS = $2500000/1000000 = $2.5 per share

Identification of potential equity share

1. Share option = Share option - [(Share option x Excercise price)/Average market price]

= 200000 - [(200000 x $15/$30)]

= 100000

2. Convertible bonds = $500000/$1000 x 100 = 50000

Calculation of incremental EPS due to potential equity share

1. Share options = 0/100000 = 0

2. Convertible bonds = [$500000 x 10% x (1-0.40)]/50000

= 0.60

Test of Dillution

Diluted EPS = (250000 + 0 + 30000)/(1000000 + 100000 + 50000)

= $2.20

Numerator Denominator Ratio Basic 2500000 1000000 2.50 Add: Share option 0 100000 2500000 1100000 2.27 Add: Convertible bonds 30000 50000 2530000 1150000 2.20

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