On December 31, 2012, Donovan, Inc had outstanding 400,000 shares of common stoc

Question

On December 31, 2012, Donovan, Inc had outstanding 400,000 shares of common stock and 42,500 shares of 8% cumulative preferred stock (par $10).

February 28, 2013, issued an additional 36,000 shares of common stock
September 1, 2013, 9,000 shares were retired.
A 10% stock dividend was declared and distributed on July 1, 2013.
At year-end, there were fully vested incentive stock options outstanding for 32,000 shares of common stock (adjusted for the stock dividend). The exercise price was $18. The market price of the common stock averaged $20 during the year. Also outstanding were $1,000,000 face amount of 10% convertible bonds issued in 2010 and convertible into 50,000 common shares (adjusted for the stock dividend). Net income was $900,000. The tax rate for the year was 35%.

Required:

Compute basic and diluted EPS (rounded to 2 decimal places) for the year ended December 31, 2013.

Explanation / Answer

by september 1 2013, common stock = 400000 + 36000 - 9000 = 427000

preferred stock = 42500 shares

cashoutflow = div on preferred stocks + dividend on common stock = 0.08 * 42500*10 + 427000*0.1*10 = $34000 + 427000 = $461000

another 320000 and 50000 common shares issued , total 5,09,000 common shares in total and 551500 shared on the whole

now net income = $ 9,00,000

EPS = net income/ total shares outstafing = 900000/551500 = $1.63

diluted EPS = net income/ common shares outstanding = 900000/509000 = $1.78

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