At December 31, 2016, the financial statements of Hollingsworth Industries inclu

Question

At December 31, 2016, the financial statements of Hollingsworth Industries included the following: Net income for 2016 $560 million Bonds payable, 10%, convertible into 36 million shares of common stock $300 million Common stock: Shares outstanding on January 1 400 million Treasury shares purchased for cash on September 1 30 million Required: Compute basic and diluted EPS for the year ended December 31, 2016


At December 31, 2016, the financial statements of Hollingsworth Industries included the following: Net income for 2016 $560 million Bonds payable, 10%, convertible into 36 million shares of common stock $300 million Common stock: Shares outstanding on January 1 400 million Treasury shares purchased for cash on September 1 30 million Required: Compute basic and diluted EPS for the year ended December 31, 2016


At December 31, 2016, the financial statements of Hollingsworth Industries included the following: Net income for 2016 $560 million Bonds payable, 10%, convertible into 36 million shares of common stock $300 million Common stock: Shares outstanding on January 1 400 million Treasury shares purchased for cash on September 1 30 million Required: Compute basic and diluted EPS for the year ended December 31, 2016


At December 31, 2016, the financial statements of Hollingsworth Industries included the following: Net income for 2016 $560 million Bonds payable, 10%, convertible into 36 million shares of common stock $300 million Common stock: Shares outstanding on January 1 400 million Treasury shares purchased for cash on September 1 30 million Required: Compute basic and diluted EPS for the year ended December 31, 2016

At December 31, 2016, the financial statements of Hollingsworth Industries included the following: Net income for 2016 $560 million Bonds payable, 10%, convertible into 36 million shares of common stock $300 million Common stock: Shares outstanding on January 1 400 million Treasury shares purchased for cash on September 1 30 million Required: Compute basic and diluted EPS for the year ended December 31, 2016

Explanation / Answer

Solution:

Numerator (Basic EPS): Net income = $560 million;

Preferred dividends = $0.

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

1/1 – 12/31 400 million x (12/12) = 400

9/1 – 12/31 (30) million x (4/12) = (10)

Weighted average # shares 390

Basic EPS = $560 ÷ 390 = $1.44

Interest not paid, net of tax = $18 million [(10% x $300 million) x 60%].

# additional shares on conversion = 36 million

Conversion ratio = $18 ÷ 36 = $0.50

Dilutive because $0.50 is less than $1.44

Basic EPS = $560 ÷ 390 = $1.44

Diluted EPS = ($560 + $18) ÷ (390 + 36) = $1.36

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