Question

Hutchins Company had​ 200,000 shares of common​ stock, 50,000 shares of convertible preferred​ stock, and​ $2,000,000 of​ 10% convertible bonds outstanding during the current year. The preferred stock was convertible into​ 40,000 shares of common stock.During the current​ year, Hutchins paid dividends of​ $1.00 per share on the common stock and​ $2.00 per share on the preferred stock. Each​ $1,000 bond was convertible into 50 shares of common stock. The net income for the year was​ $1,000,000 and the income tax rate was​ 30%.Basic earnings per share for the current year was​ (rounded to the nearest​ penny):A) 4.55B) 4.50C) 5.00D) 4.30

Answer 1

The basic earnings per share for Hutchins Company is calculated by taking the net income, subtracting the preferred dividends, and dividing by the total number of common shares outstanding. The basic EPS is found to be $4.50.

Step-by-step explanation:

The student is asking about how to calculate basic earnings per share (EPS) for Hutchins Company considering its common stock, convertible preferred stock, and convertible bonds. To determine the basic EPS, we must first calculate the number of common shares outstanding. The company has 200,000 common shares and 50,000 shares of convertible preferred stock, which can be converted to 40,000 common shares. To calculate the basic earnings per share:

• Start with a net income: of $1,000,000.
• Subtract the preferred dividends: 50,000 shares × $2.00 = $100,000.
• Use the remaining income for common shareholders: $1,000,000 - $100,000 = $900,000.
• Divide by the number of common shares outstanding: $900,000 ÷ 200,000 = $4.50.

Thus, the basic earnings per share for the current year is $4.50, which corresponds to option B.