Question

dirty boots inc. (dbi) had: net income before tax of $2,400,000 in year 1. effective tax rate is 20%. weighted average number of common shares outstanding of 3,000,000. 100,000 cumulative preferred shares issued and outstanding throughout year 1. dividend rate is $3 per share; no dividend was declared for year 1. each preferred share is convertible to two common shares at the option of the shareholder; no conversions happened during year 1. what are dbi's basic and diluted eps for year 1, respectively?

Answer 1

The basic EPS for Dirty Boots Inc. for year 1 is $0.64 per share while the diluted EPS is $0.60 per share, after accounting for the effective tax rate and potential conversion of preferred shares.

Step-by-step explanation:

The student has asked about calculating the basic and diluted earnings per share (EPS) for Dirty Boots Inc. (DBI) for year 1. To calculate the basic EPS, you would take the net income available to common shareholders, which is net income after taxes and preferential dividends, and divide it by the weighted average number of common shares outstanding. With an effective tax rate of 20%, DBI would have a net income after tax of $1,920,000 (which is $2,400,000 less 20% tax). As no dividends were declared for the cumulative preferred shares, the net income available to common shareholders remains at $1,920,000. Thus, the basic EPS would be $1,920,000 divided by 3,000,000 common shares, equaling $0.64 per share.

For diluted EPS, we need to consider the effect of the conversion of preferred shares to common shares. Since each preferred share is convertible into two common shares, the conversion would add 200,000 common shares (100,000 preferred shares multiplied by 2). The weighted average number of common shares would therefore increase to 3,200,000. The diluted EPS would then be $1,920,000 divided by 3,200,000, equaling $0.60 per share.