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On January 1, 2013, Tonge Industries had outstanding 820,000 common shares (par

ID: 2504307 • Letter: O

Question

On January 1, 2013, Tonge Industries had outstanding 820,000 common shares (par $1) that originally sold for $25 per share, and 4,000 shares of 10% cumulative preferred stock (par $100), convertible into 40,000 common shares.

    On October 1, 2013, Tonge sold and issued an additional 12,000 shares of common stock at $38. At December 31, 2013, there were incentive stock options outstanding, issued in 2012, and exercisable after one year for 27,000 shares of common stock at an exercise price of $35. The market price of the common stock at year-end was $53. During the year the price of the common shares had averaged $45.

  

Compute basic and diluted EPS for the year ended December 31, 2013. (Do not round intermediate calculations and round your final answers to 2 decimal places.)


On January 1, 2013, Tonge Industries had outstanding 820,000 common shares (par $1) that originally sold for $25 per share, and 4,000 shares of 10% cumulative preferred stock (par $100), convertible into 40,000 common shares.

    On October 1, 2013, Tonge sold and issued an additional 12,000 shares of common stock at $38. At December 31, 2013, there were incentive stock options outstanding, issued in 2012, and exercisable after one year for 27,000 shares of common stock at an exercise price of $35. The market price of the common stock at year-end was $53. During the year the price of the common shares had averaged $45.

     Net income was $960,000. The tax rate for the year was 40%.

Explanation / Answer

1) Basic EPS =( net income - preferred dividens) / weighted average shares of common


basic EPS = 960000+4000 / ((820,000*1) +(0.25*12000)) = 956000/ 823000 = 1.17


2) Diluted EPS = [(net income - preferred dividend) / weighted average number of shares outstanding - impact of convertible securities - impact of options, warrants and other dilutive securities]


Other form:
(net income - preferred dividends) + convertible preferred dividend + (convertible debt interest * (1-t))

Divided by

weighted average shares + shares from conversion of convertible preferred shares + shares from conversion of convertible debt + shares issuable from stock options.


Net increase of common shares from exercise of stock options = 27000 - (35/45) * 27000 = 6000


total shares outstanding = 823000+40000+6000 = 869000


dilured EPS =( 960000-4000) / 866000 = 956000/869000 = 1.10



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