At January 1, 2016, Canaday Corporation had outstanding the following securities

Question

At January 1, 2016, Canaday Corporation had outstanding the following securities: 610 million common shares 25 million 6% cumulative preferred shares, $50 par 8% convertible bonds, $2,500 million face amount, convertible into 60 million common shares The following additional information is available: • On September 1, 2016, Canaday sold 72 million additional shares of common stock. • Incentive stock options to purchase 50 million shares of common stock after July 1, 2015, at $10 per share were outstanding at the beginning and end of 2016. The average market price of Canaday’s common stock was $20 per share during 2016. • Canaday's net income for the year ended December 31, 2016, was $1,480 million. The effective income tax rate was 40%. Required: 1. & 2. Calculate basic and diluted earnings per common share for the year ended December 31, 2016. (Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)

Explanation / Answer

Answer: Numerator (Basic EPS): Net income = $1,480 million; Preferred dividends = $75 million [(6% x $50) x 25 million]. Because the preferred stock is cumulative dividends are included whether or not preferred stock is cumulative , dividends are included whether or not paid.

Denominator (Basic EPS): Weighted average number shares common stock outstanding

1/1-12/31   610 million*(12/12)=610 million

9/1-12/31    72 million(4/12)=24 million

Weightage average no of share=634 million

EPS= (1480-75)/634=$2.22 per share

Stock Options: Use the Treasury Stock Method if dilutive.

1. Are the stock options dilutive? Yes because the exercise price of $10 is less than the average market price of $20.

2. Assume exercise at the later of the date of issue (7/1/15) or the beginning of the period(1/1/16). Assume exercise 1/1/16.

3. Proceeds received on exercise = 50 million x $10 = $500 million

4. No. Shares repurchased = $500 million ÷ $20 = 25 million

5. Net increase in No. shares outstanding = 25 million (50 million – 25 million)

6. EPS with the inclusion of the options: ($1,480 - $75) ÷ (634 + 25) =$2.13 (this will be used to test for dilutive effect of convertible bonds)

Convertible Bonds: Use the If Converted Method

1. Assume conversion at later of date of issue (?) or beginning of year(1/1/16). Assume conversion on 1/1/16.

2 Interest not paid net of tax = $120 million [(8% x $2,500 million) x60%]

3. No. additional shares on conversion = 60 million

4. Conversion ratio = $120 ÷ 60 = $2.0

5. Dilutive because $2.0 is less than $2.13.

Basic EPS= (1480-75)/634=$2.22 per share

Diluted EPS= (1480-75+120)/634+25+60=1525/719

=2.12

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.