Question

As of January 1, 2019, Nike, Inc. had 400,000 common shares outstanding and 250,000 preferred shares outstanding. All preferred shares can be exchanged (converted) for 250,000 common shares and the conversion rate is adjusted for stock splits and stock dividends. On July 1, 2019, Nike declared a 2:1 common stock split (also applies to preferred conversion rate). This was the only transaction carried out in 2019 that affected the outstanding common shares.

No exchange of preferred shares occurred.
In 2019, Nike declared cash dividends of $300,000 to common stockholders and $200,000 to preferred stockholders.
The company reported net income of $1,700,000. The company closes books on December 31 of each year.
Determine the EPS-Diluted to be reported in the 2019 statement of income and expenses.

Answer 1

The diluted earnings per share (EPS-Diluted) for Nike, Inc. for the year 2019 is calculated by taking the net income available to common shareholders ($1,500,000 after subtracting preferred dividends) and dividing it by the adjusted number of common shares (1,050,000 shares considering the stock split and full potential conversion of preferred shares), which gives us approximately $1.43 per share.

Step-by-step explanation:

To determine the diluted earnings per share (EPS-Diluted) for Nike, Inc. for the year 2019, we first need to account for the stock split and the potential conversion of preferred shares into common shares. On January 1, 2019, Nike had 400,000 common shares and 250,000 preferred shares outstanding. Since a 2:1 stock split occurred on July 1, 2019, we must double the number of common shares that would have been outstanding without any conversions. Thus, the adjusted number of common shares for the entire year would be 400,000 x 2 = 800,000 shares.

However, because preferred shares are convertible to common shares, we also have to consider what would happen if all the preferred shares were converted. The 250,000 preferred shares could be converted into an additional 250,000 common shares post-split (since the rate adjusted for the split), bringing the total to 1,050,000 common shares.

To calculate the EPS-Diluted, we take the net income available to common stockholders, which is the net income minus preferred dividends because these dividends are not available to common stockholders. So, the net income for common shareholders would be $1,700,000 - $200,000 (preferred dividends) = $1,500,000.

Finally, the diluted EPS would be calculated as follows:
EPS-Diluted = Net Income Available to Common Shareholders / Adjusted Number of Common Shares

EPS-Diluted = $1,500,000 / 1,050,000 = approximately $1.43 per share.