Assume that the following data relative to Kane Company for 2018 is available: N
ID: 2520384 • Letter: A
Question
Assume that the following data relative to Kane Company for 2018 is available: Net Income $2,870,000 Transactions in Common Shares Jan. 1, 2018, Beginning number Mar. 1, 2018, Purchase of treasury shares June 1, 2018, Stock split 2-1 Nov. 1, 2018, Issuance of shares Change Cumulative 680,000 (56,400) 623,600 623,600 1,247,200 210,000 1,457,200 6% cumulative convertible preferred stock Sold at par, convertible into 200,000 shares of common (adjusted for split). $1,000,000 Stock Options Exercisable at the option price of $25 per share. Average market price in 2018, $30 (market price and option price adjusted for split). 81,000 shares Compute weighted average shares outstanding for 2018. Weighted average shares outstanding Compute the basic earnings per share for 2018. (Round answer to 2 decimal places, e.g. 52.75.)Explanation / Answer
Solution 1:
Weighted average outstanding share before stock split = 680000*2/12 + 623600 * 10/12 = 633000
Weighted averge outstanding shares after stock split = 210000*2/12 = 35000
Total weighted average outstanding shares after considering effect of stock split = 623000*2 + 35000 = 1281000
Net Income = $2,870,000
Preferred dividend = $1,000,000*6% = $60,000
Earning available for common shareholder = $2,870,000 - $60,000 = $2,810,000
EPS = Earnings available for common shareholders / Weighted average outstanding shares
= $2,810,000 / 1281000 = $2.19 per share
Solution 2:
Preferred stock convertible in to number of common shares = 200000
Amount to be paid for stock option = 81000*25 = $2,025,000
Value of option in current shares = Amount paid to exercise option / Current market price = $2,025,000 / 30 = 67500 shares
Diluted shares = Option issued - Value of option in current shares= 81000 - 67500 = 13500
Future earnings for equity share holders = $2,870,000
Future weighted average outstanding shares = 1281000 + 200000 + 13500 = 1494500 shares
Diluted EPS = $2,870,000 / 1494500 = $1.92
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