Assume that the following data relative to Kane Company for 2015 is available: N

Question

Assume that the following data relative to Kane Company for 2015 is available: Net Income $2,800,000 Jan. 1, 2015, Beginning number of Common Shares 700,000 Transactions in Common Shares in 2015 On April 1, the corporation purchased on the market 60,000 of its own outstanding shares. On July 1, the corporation declared and issued a 2-for-1 stock split. On October 1, the corporation issued 240,000 new shares to raise additional capital. The following dilutive securities were issued prior to 2015. 10% Cumulative Convertible Preferred Stock Sold at par, convertible into 200,000 shares of common $1,000,000 Stock Options Exercisable at the option price of $20 per share. Average market price in 2015, $30 90,000 shares 9% Convertible Bonds Sold at par. Each $1,000 bond is convertible into 20 shares of common stock. $1,000,000 Tax rate is 40% in year 2015. Required: 1. Compute the weighted average shares outstanding during the year 2015. 2. Compute the basic earnings per share for 2015. (Round to the nearest penny.) 3. Compute the diluted earnings per share for 2015. (Round to the nearest penny.) You have to show the proper intermediate steps to get full credit.

Explanation / Answer

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1 Change Final Period in month Ratio (period/12) Average number of outstanding shares (Final*Ratio) Jan 1 2015 Beginning 700000 3 0.25 175000 April 1 Purchased -60000 640000 3 0.25 160000 July 1 Split 2 for 1 640000 1280000 3 0.25 320000 Oct 1 New 240000 1520000 3 0.25 380000 12 1035000 2 Basic Earning Per Share (Net income-Preferred Dividend)/weighted average no of shares Basic Earning Per Share (2800000-100000)/1035000 Basic Earning Per Share                                                                                       2.61 Preferred Dividend 1000000*10%=100000 3 Additional share for the purpose of Dilluted earning per share 10% convertible preferred stock 200000 Stock Option: Proced from exercise 90000*20 1800000 Shares issued after exercise 90000 Less: Treasury stock purchased with proceeds 60000 (1800000/30 market price) Additional Share on stock option 90000-60000 30000 9% Convertible Bond 1000000/1000*20 20000 Total Additional shares for Dilluted EPS 250000 Dilluted EPS: Net After tax income 2800000 Add: back interest on bond 1000000*9% 90000 Less: Income Tax 40% 90000*40% 36000 Net income for Dilluted EPS 2854000 Diluted EPS 2854000/(1035000+250000 additional share) Diluted EPS                 2.22

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