(15 points) Dulce Corporation had 200,000 shares of common stock outstanding dur
ID: 2556313 • Letter: #
Question
(15 points) Dulce Corporation had 200,000 shares of common stock outstanding during the current year, and net income of $4 million. All throughout the year, there were also outstanding: fully vested options for 10,000 shares of common stock, that were granted with an exercise price of $20, and $3 million, 7% bonds, that had been issued at par, and which could be converted into 30,000 shares of common stock. 1. 2, Dulce's tax rate equals 30%. The market price of its common stock averaged $25 for the year. Compute basic and diluted earnings per share.Explanation / Answer
Basic EPS = Net Income / Number of common shares outstanding
=> $4,000,000 / 200,000 = $20
Diluted EPS = (Net Income + After-tax interest on convertible debt) / (Weighted average number of common shares outstanding during the period + All dilutive potential common stock)
Net Income = $4,000,000
After-tax interest on convertible debt = ($3,000,000 x 7%) x (100% - 30%) = $147,000
Weighted average number of shares = 200,000 Shares (Since no change was experienced during the year)
Dilutive common stock:
Options:
Number of shares issued under assumed exercise of options = 10,000
Proceeds from the exercise of options = 10,000 x $20 = $200,000
No of shares issued at fair value with the same proceeds = $200,000 / $25 = 8,000
Incremental equivalent shares = 10,000 – 8,000 = 2,000
Convertible bonds:
Number of shares to be issued, if converted = 30,000
(The impact of conversion has already been taken into account with after-tax interest inclusion in Net Income)
Diluted EPS = ($4,000,000 + $147,000) / (200,000 + 2,000 + 30,000) = $17.875
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