Instructions:For each of the unrelated situations below, calculate diluted earni

Question

Instructions:For each of the unrelated situations below, calculate diluted earnings per share as it should be reported for 2010. Ramirez Corporation has 400,000 shares of common stock outstanding throughout 2010. In addition, the corporation has 5,000, 20-year, 7% bonds issued at par in 2008. Each $1,000 bond is convertible into 20 shares of common stock. During the year 2010, the corporation earned $600,000 after deducting all expenses. The tax rate was 30%. Brewer Company had 400,000 shares of common stock outstanding during the year 2010. In addition, at December 31, 2010, 90,000 shares were issuable upon exercise of executive stock options which require a $40 cash payment upon exercise (options granted in 2008). The average market price during 2010 was $50. During the year 2010, the corporation earned $522,500 after deducting all expenses. The tax rate was 30%.

Explanation / Answer

Ramirez Corporation:

Step 1: Basic EPS = Earnings for Equity shareholders / Weighted Average of Equity Shares

= 600000 / 400000

= $1.5 per share

Step 2: Identify Potential Equity Shares:

Incremental EPS = 5000000 x 7% x (1-0.30) / 100000 = $2.45

Step 3: Test for Dilution:

Dilutive EPS = [600000 / 400000]

= $1.5 per share

Brewer Company:

Step 1: Basic EPS = Earnings for Equity shareholders / Weighted Average of Equity Shares

= 522500 / 400000

= $1.30625

Step 2: Identify Potential Equity Shares:

ESOP = 90000 - [90000 x 40 / 50]

= 18000

Incremental EPS = 0 / 18000 = 0

Step 3: Test for Dilution:

Dilutive EPS = [(522500 + 0) / (400000 + 18000)]

= $1.25 per share

Numerator Denominator Ratio BEPS 600000 400000 1.5 + Bonds (Anti - Dilutive) 245000 100000 845000 500000 1.69

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