Question

A firm with a net income of $30,000 and weighted average actual shares outstanding of 15,000 for the year also had the following two securities outstanding the entire year: (1) 2,000 options to purchase one share of stock for $12 per share. The average share price during the year was $20, (2) cumulative convertible preferred stock with an annual dividend commitment of $4,500. Total common shares issued on conversion are 2,900. Compute diluted EPS for this firm.

Answer 1

$1.68

Step-by-step explanation:

Diluted EPS = Earnings Attributable to Potential Ordinary Shareholders ÷ Weighted Average Number Ordinary Shareholders plus Potential Voting Rights

where,

Earnings Attributable to Potential Ordinary Shareholders = $30,000

and

Weighted Average Number Ordinary Shareholders plus Potential Voting Rights

Weighted average actual shares outstanding = 15,000

Plus Potential voting rights of 2,000 options = 1

Plus Potential voting right of preferred stock = 2,900

Total = 17,901

therefore,

Diluted EPS = $30,000 ÷ 17,901

= $1.68