Riggs Corporation has the following balance sheet information at December 31, 20
ID: 2578015 • Letter: R
Question
Riggs Corporation has the following balance sheet information at December 31, 2016.
Current liabilities $800,00
Convertible bonds ($1,000 par, 5%) $2,000,000
Common stock ($1 par, 300,000 shares issued) $300,000
Additional paid-in capital $2,100,000
Retained earnings $3,230,000
Treasury stock (43,000 shares) ($1,161,000)
Total liabilities and shareholders' equity $7,269,000
The convertible bonds were issued at par in 2014 and are convertible into Riggs's common stock at a ratio of 15 stock to 1 bond. In its December 31, 2016 annual report, Riggs reported 125,000 exercisable qualified stock options. Each option allows the holder to acquire one share of common stock for $19 per share. All of the options were outstanding at the end of 2017. On October 1, 2017, Riggs purchased 32,000 shares of treasury stock for $50 per share. The avarage market price of the common stock during 2017 was $50 per share, and the December 31, 2017, price was $56. Riggs's net income for the year ended December 31, 2017, was $825,000, and its tax rate was 35%.
Required:
1. Compute Riggs's basic EPS for the year ended December 31, 2017
2. Compute Riggs's dilluted EPS for the year ended December 31, 2017. There are no antidilutive securities.
Explanation / Answer
1. Basic EPS = Profit attributable for ordinary shareholders – Preferred dividends / Weighted average no of Ordinary shares
Basic EPS = 825 000 / 300 000
= $2.75
2. Diluted EPS = (Net income + after tax interest savings) / (weighted average no of ordinary shares)
= 825 000 + 65 000 (2 000 000 * .05 * .65) / 300 000 + 30 000 (2 000 000/1000 * 15) + *77 500 + 8000(32 000 / 12 *3)
=$ 2.14
*Dilutive effect on exercisable qualified stock option = 125 000/50 * 19 = 47 500
= 125 000 – 47 500
= 77 500
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