Nabisco Company had 200,000 shares of common stock issued and outstanding at Dec
ID: 2549218 • Letter: N
Question
Nabisco Company had 200,000 shares of common stock issued and outstanding at December Nabisco issued 400,000 shares of convertible preferred stock. During 2018, Nabisco declared and paid $180,000 cash dividends on the common stock and $150,000 on the convertible preferred stock. Net income for the year ended December 31, 2018 was $960,000. Tax rate is Additional information: Each preferred stock is convertible to one share of common stock. A) Compute EPS for 2018 B) Compute dilutive EPS for 2018.Explanation / Answer
Given ,Net income of Nabisco company for the year 2018=$9,60,000
On January 1st 2018 Nabisco issued 4,00,000 convertible preferred stock
On July 1st 2018 Nabisco issued 2,00,00 preferred stock.
~Now computation of BASIC EPS.
We know that Basic EPS= NET PROFIT FOR THE YEAR ÷ TOTAL NUMBER OF OUTSTANDING SHARES AT THE END OF YEAR
Therefore we need to calculate total number of outstanding shares at the end of year 2018
•2,00,000 shares×12/12=2,00,000 shares (shares are outstanding for a period of 12 months since they exist from begining of the year)
•2,00,000 shares×6/12=1,00,000 shares (shares are outstanding for a period of 6 months since they are issued in the middle of the year i.e. on july 1st 2018)
therefore total number of outstanding shares as on 31st December 2018 are =2,00,000+1,00,000=3,00,000 shares.
net income of the year $9,60,000(given)
Hence BASIC EPS = $9,60,000÷3,00,000 shares
=$3.2
~Now computation of DILUTED EPS.
We know that DILUTED EPS = NET PROFIT ATTRIBUTABLE TO POTENTIAL PREFERRED STOCK ÷ NUMBER OF POTENTIAL PREFERRED STOCK
-First we will calculate number of potential preferred stock as follows:
•(2,00,000 shares+1,00,000 shares) as calculated for BASIC EPS
•on January 1st 2018 Nabisco issued 4,00,000 convertible preferred stock ,in calculation of DILUTED EPS they should be treated as if they were converted into preferred stock in the begining of the year 2018.therefore they should be included in the number of potential preferred stock i.e. 4,00,000×12/12=4,00,000 shares
Then total number of POTENTIAL PREFERRED STOCK =(2,00,000 shares+1,00,000 shares)+4,00,000 shares=7,00,000 shares.
*NOTE:Actually preferred stock has not converted yet but only for the calculation of DILUTED EPS we are assuming as if they were converted.
-Now we will calculate net income attrabutable to potential preferred stock.
we can here observe that in case of convertible preferred stock we do not need to pay dividend after conconversion(as we are assumed) so the net income will increase by that amount which we need to pay i.e.$1,50,000
As our net income got increased by $1,50,000 so we need to pay tax @30 on the increased income i.e. $1,50,000×30=$45,000
therefore net income for the purpose of diluted eps is as follows=$9,60,000+$1,50,000-$45,000 =$10,65,000
Hence DILUTED EPS =$10,65,000÷$7,00,000
=$1.52
Hence DILUTED EPS =$10,65,000÷$7,00,000
=$1.52
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