Problem Facts Information related to the Sosa Company for the year 2020: Common
ID: 2607780 • Letter: P
Question
Problem Facts Information related to the Sosa Company for the year 2020: Common Stock As of the end of 2020, Sosa had 240,000 shares of common stock outstanding. The shares are due to the following common stock transactions: January 1, 2020 – 100,000 shares of common stock outstanding April 1, 2020 – issued an additional 50,000 shares for cash July 1, 2020 - issued a 2 for 1 stock split September 1, 2020 – purchased 60,000 shares for treasury stock Preferred Stock As of the end of 2020, Sosa had 30,000 shares of 6%, $10 par value, cumulative, convertible preferred stock outstanding. The stock had been outstanding all year and the conversion ratio was each share of preferred stock is convertible into 3 shares of common stock. Bonds Payable As of the end of 2020, Sosa had $800,000, 7% bonds payable outstanding. The bonds had been outstanding for the entire year and each $1,000 bond was convertible into 10 shares of common stock. Options Sosa also had 10,000 common stock options outstanding all year. Each option allowed the holder to purchase 1 share of Sosa’s common stock for $45. During 2020, the average market price of Sosa’s common stock was $48 per share. Additional Information Sosa’s 2020 net income was $580,000, and the company’s income tax rate was 34%. REQUIRED 1. Compute the weighted average number of common shares Sosa will use to compute basic earnings per share. (5 points) 2. Compute 2020 basic earnings per share (3 points) 3. Identify which of the potentially dilutive securities (preferred stock, bonds, options) are dilutive (support must be shown to receive credit for this question) (8 points) 4. Compute diluted earnings per share (4 points) Check Figures:
Basic EPS = $2.20
Diluted EPS = $1.68
Explanation / Answer
1. Weighted Number of Equity Shares :
Numbers of days the shares are outstanding
Number of days in the period
Total Months in a year 12
S.No
Date
Particular
Shares
Cumulative Shares
No of Months Outstanding
(Current date – date of next transactions)
Calculation
Weighted Number of shares
1
Jan 1, 2020
Outstanding at the beginning
100,000
100,000
3 Months
100000*3/12
25000
2
Apr 1, 2020
Issued
50000
150000
3 Months
150000*3/12
37500
3
July 1, 2020
Issued for stock split (150000*2/1)
300000
450000
2 Months
450000*2/12
75000
4
Sept 1, 2020
Purchased
-60000
390000
4 Months
390000*4/12
130000
Total
267500
267500 Weighted Number of common shares will use to calculate basic earnings per share.
2.Earnings Per Share (EPS) :
Net profit or loss attributable to ordinary shareholders during a period / by the weighted average number of ordinary shares in issue during the period.
Net profit or loss attributable to ordinary shareholders during a period =
Net Profit after tax – Preference Dividend
S.No
Particulars
Amount in $
1
Net Income
580000
2
Less: Income Tax @ 34%
-197200
Net Profit After Tax
382800
3
Less : Preference Dividend
(30000*10*6%)
-18000
Net profit or loss attributable to ordinary shareholders during a period
364800
Weighted average number of ordinary shares in issue during the period: 267500
EPS = 364800/267500
= $ 1.36
3. Increase in earnings attributable to equity shareholders on conversion of potential equity shares
Particulars
Increase In Earning
(1)
Increase in Number of Equity Shares
(2)
Earnings per Incremental share
(3) = (1)/(2)
Preferred Stock
=30000*6*10%
$18000
=30000*3
90000
0.2
Bonds Payable
=$800000*7%
$56000
=800000*10/1000
8000
7
Options
Nil
=10000*(48-45)/48
625
NIL
Options are most dilutive as their earnings per incremental share is NIL, then followed by Preferred stock 0.2 and then Bonds Payable 7.0
4.Dilutive Earnings Per Share
Dilutive EPS = (Total Income –Preferred Dividend)/(Outstanding shares+ Diluted Shares)
For the purpose of computation of diluted EPS, Options will be considered first, Preferred Stock being second most dilutive will be considered next and thereafter Bonds payable will be considered
Particulars
Net Profit Attributable to Equity Shareholders
$
No of Equity Shares
Net Profit Attributable per share
$
Remark
As reported 31.12.2020
364800
267500
1.364
EPS
Options
0
625
Total
364800
268125
1.361
Diluted EPS
Preferred Stock
18000
90000
Total
382800
358125
1.67
Diluted EPS
Bonds Payable
56000
8000
Total
438800
366125
1.198
Anti-Diluted EPS
Since Diluted earnings per share is increased when taking the Bonds payable into account ( $1.67 to 1.198), the Bonds payable are anti-dilutive and are ignored in the calculation of diluted earnings per share for the year ended 2020.
Therefore diluted earnings per share for the year 2020 is $ 1.67
50.
S.No
Date
Particular
Shares
Cumulative Shares
No of Months Outstanding
(Current date – date of next transactions)
Calculation
Weighted Number of shares
1
Jan 1, 2020
Outstanding at the beginning
100,000
100,000
3 Months
100000*3/12
25000
2
Apr 1, 2020
Issued
50000
150000
3 Months
150000*3/12
37500
3
July 1, 2020
Issued for stock split (150000*2/1)
300000
450000
2 Months
450000*2/12
75000
4
Sept 1, 2020
Purchased
-60000
390000
4 Months
390000*4/12
130000
Total
267500
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