Ask Question
4 February, 03:53

The information below pertains to Barkley Company for 2015.

Net income for the year $1,160,000

7% convertible bonds issued at par ($1,000 per bond); each bond is convertible into 30 shares of common stock 2,010,000

6% convertible, cumulative preferred stock,

$100 par value; each share is convertible into 3 shares of common stock 4,080,000

Common stock, $10 par value 5,800,000

Tax rate for 2021 20%

Average market price of common stock $25 per share

There were no changes during 2021 in the number of common shares, preferred shares, or convertible bonds outstanding. There is no treasury stock. The company also has common stock options (granted in a prior year) to purchase 82,100 shares of common stock at $20 per share.

(a) Compute basic earnings per share for 2015.

(b) Compute diluted earnings per share for 2015.

0
Answers (1)
  1. 4 February, 05:52
    0
    a. $1.38

    b. anti-dilutive.

    Explanation:

    Basic Earnings Per Share = Earnings Attributable to Holders of Common Stock / Weighted Average Number of Common Stock Holders

    Earnings Attributable to Holders of Common Stock Calculation:

    Net income for the year $1,160,000

    Less Bond Interest after tax ($2,010,000 * 7% * 80%) ($112,560)

    Less Preference Stock dividend ($4,080,000 * 6%) ($244,800)

    Earnings Attributable to Holders of Common Stock $802,640

    Weighted Average Number of Common Stock Holders Calculation:

    Common Stock (5,800,000 / $10) 580,000

    Weighted Average Number of Common Stock Holders 580,000

    Basic Earnings Per Share = $802,640 / 580,000

    = $1.38

    Diluted Earnings Per Share = Adjusted Earnings Attributable to Holders of Common Stock / Adjusted Weighted Average Number of Common Stock Holders

    Adjusted Earnings Attributable to Holders of Common Stock Calculation:

    Earnings Attributable to Holders of Common Stock $802,640

    Add Back Bond Interest after tax ($2,010,000 * 7% * 80%) $112,560

    Add Back Preference Stock dividend ($4,080,000 * 6%) $244,800

    Adjusted Earnings Attributable to Holders of Common Stock $1,160,000

    Adjusted Weighted Average Number of Common Stock Holders Calculation

    Weighted Average Number of Common Stock Holders 580,000

    Add Convertible Bonds ($2,010,000 / $1,000 * 30) 60,000

    Add Convertible Preference Shares ($4,080,000/$100 * 3) 122,400

    Less Common Stock Options (82,100)

    Adjusted Weighted Average Number of Common Stock Holders 680,300

    Diluted Earnings Per Share = $1,160,000 / 680,300

    = $ 1.70

    Conclusion : Convertible Bonds, Convertible Preference Shares and Common Stock Options are anti-dilutive.
Know the Answer?