On January1, 2016, Bell Company had 100,000 shares of common par, cumulative pre
ID: 2798621 • Letter: O
Question
On January1, 2016, Bell Company had 100,000 shares of common par, cumulative preferred stock outstandi treasury stock for $40 per share. It shares on stock outstanding and 30,000 shares of 7%, S50 shares at $40. During 2016, the average market price of the common December 3 1 . The company's tax rate is 40%. was S1,085,430. Also outstanding in 2016 were sold 6,000 treasury shares on October 1, at $45 per share. Net income for 2016 stock options giving executives the right to buy 50,000 common shares was $50 with a closing price of $56 on ng. On March 1. Bell purchased 24,000 shares of common stock 10 million dollars of3% bonds were issued at face common stock, in a ratio of 1:5. None of them had value on January 1, 2016. Those bonds are convertible into been converted by December 31 and no stock options were exercised during the year. In 2012, to facilitate the acquisition of a local company, Bell had entered into an sharcholders of that company, if they would vote for the acquisition, 12,000 shares of Bell if the net income of the local company reached $900,000 in 2017. agreement promising the quired: Showing your computations, present in good order Bell's earnings per share for 2016.Explanation / Answer
Common Stock Outstanding = 100000, Preferred Stock Outstanding = 30000, Stock Options Outstanding = 50000 common stock. Number of Common stocks on Option to local company = 12000
Convertible Bonds Value = $ 10 million, Let Par Value of Bond be $1000.
Therefore, number of Convertible Bonds = Convertible Bonds Value / Par Value of Bond
Calculation of Bond Par Value:
Conversion Ratio of Bond = 5:1 (which means one bond is convertible into 5 common shares)
Conversion Ratio = Par value of bond / Average Stock Price
Par Value of Bond = Conversion Rato X Average Common Stock Price = 5 x 50 =$ 250
Therefore, Number of Convertible Bonds = 10000000 / 250 = 40000 Bonds
Number of Common Shares Upon Conversion = Conversion Ratio X Number of Convertible Bonds = 40000 x 5 =200000
Dividend Calculation of Preferred Stock:
Dividend Payable per share of preferred stock =7% of Par Value of Preferred Stock
Preferred Stock Par value =$ 50. Therefore Dividend Paid = 0.07 x 50 = $ 3.5 per share of preferred stock
Total Dividend = Dividend per share x Total Number of Preferred Stock = 3.5 x 30000 = $ 105000
On December 31, 2016 :
Initial number of outstanding common stocks = 100000
LESS: Common Stock Purhcased = (24000)
ADD: Common Stock Sold = 6000
Total Outstanding Common Stock (on Dec 31, 2016) = 100000 - 24000 + 6000 = 82000
Net Income = $ 1085430
Therefore, Basic EPS (earning's per share) = (Net Income - Preferred Dividend) / Number of Outstanding Common Stock = (1085430 - 105000) / 82000 = $ 11.95
Full Diluted EPS = (Net Income - Preferred Dividend) / ( Common Stock Outstanding + Common Stock Options + Number of Common Stock bonds are convertible into + Number of Common Stock on Option to Local Company)
=(1085430 - 105000) / (82000 + 50000 + 200000 + 12000) = $ 2.85
NOTE : Fully Diluted EPS expresses earnings net of preferred dividend per unit value of all common stocks outstanding plus all securities convertible into or exercisable as common stock. Basic EPS expresses Net Income less of preferred dividend per unit of outstanding common stock.
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