iRggs Corporation has the following balance sheet information at December 31, 20
ID: 2578107 • Letter: I
Question
iRggs Corporation has the following balance sheet information at December 31, 2016. Current liabilities...............................................$ 800,000
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 shares of 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 average 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. Round to the nearest cent. 2. Compute Riggs's diluted EPS for the year ended December 31, 2017. There are no anti-dilutive securities. Round to the nearest cent.
Hint: Answers not 2.15 and 1.33
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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