Kweli Co. began the year with 1,700,000 shares issued and outstanding. On March

ID: 2536624 • Letter: K

Question

Kweli Co. began the year with 1,700,000 shares issued and outstanding. On March 1, 2017, the company enacted a 2:1 stock split. On August 1, 2017, the company repurchased 500,000 shares. Kweli Co. has the following potentially dilutive instruments. • 50,000 shares of $300 par value 10% preferred shares, each convertible into 5 shares of common stock. • 200,000 options to purchase the firm’s $1 par value common stock at an exercise price of $40 a share. The options were issued when the firm’s stock was trading at $35 a share. The average stock price of Kweli’s common shares for 2017 was $55.

Determine the following:

A. The amount of weighted-average common shares outstanding for Kweli at 12/31/17.

B. Basic EPS for Kweli Co. Assume net income for 2017 was $5,500,000.

C. The diluted EPS figure Kweli would report for 2017. Report dilution indices and intermediate DEPS calculations for consideration of partial credit.

Explanation / Answer

Opening Count of Shares

1700,000

Issue of New Shares 1700,000*10/12

1416,666.667

Buy Back of Shares 500,000*5/12

(208,333.333)

Weighted Average of Common shares Outstanding

2908,333.334

Basic EPS: = 5500000/2908333.334 = $1.89

Diluted EPS: = 5500000/3358,333.334 = $1.64

Diluted Equity Shares = Common Shares + Potential preference shares + Options

= 2908,333.334+(50,000*5) + 200,000

= 3358,333.334