Francis Company has 20,000 shares of common stock outstanding during all of 2016

ID: 2468278 • Letter: F

Question

Francis Company has 20,000 shares of common stock outstanding during all of 2016. It also has two convertible securities outstanding at the end of 2016. These are: Convertible preferred stock: 2,000 shares of 9.5%, $50 par, preferred stock were issued on January 2, 2016, for $60 per share. Each share of preferred stock is convertible into 3 shares of common stock. Current dividends have been declared. To date, no preferred stock has been converted. Convertible bonds: Bonds with a face value of $200,000 and an interest rate of 5.7% were issued at par in 2015. Each $1,000 bond is convertible into 22 shares of common stock. To date, no bonds have been converted. Francis earned net income of $61,500 during 2016. Its income tax rate is 30%.

Required: (a) Compute the 2016 diluted earnings per share. Round your answer to two decimal places.

(b) What basic earnings per share amount would Francis report on its 2016 income statement? Round your answer to two decimal places.

Explanation / Answer

Solution:

(a) Calculation of diluted earnings per share for Year 2016

Diluted Earnings per Share = Potential Income / Potential No. of shares of common stock

No. of Potential shares of common stock outstanding = Common Stock shares outstanding at the end of 2016 + Dilutive Potential Convertible Preferred Stock + Dilutive Potential Convertible bonds

= 20,000 + (2,000 x 3 shares) + (200 x 22 shares)

= 20,000 + 6,000 + 4,400

= 30,400 Shares

Potential Income for dilated earnings per share = Net Income of Year 2016 + Interest on Bonds (after tax)

= $61,500 + [$200,000 x 5.7% (1 – 0.30)] = $61,500 + $7,980 = $69,480

Diluted Earnings per Share = $69,480 / 30,400 = $2.2855 or $2.29

Note --- Since after conversion of bonds into common stock, company will not incur interest expenses. Therefore we need to adjust the same in the earnings. Interest Expenses after tax will be the saving for company, hence it is added back to the Net Income of the year in order to calculate dilutive income.

(b) Calculation of Basic Earnings Per Share

Net Income

$61,500

Less: Preferred Stock Dividend (2,000 x $50 x 9.5%)

($9,500)

Earnings attributable to Common Stock holders

$52,000

Divide by number of common stock outstanding

20,000

Basic Earnings Per Share

$2.60