Question

The information below pertains to Teal Company for 2021.

Net income for the year $1,150,000
6% convertible bonds issued at par ($1,000 per bond); each bond is convertible into 30 shares of common stock 2,040,000
6% convertible, cumulative preferred stock,
$100 par value; each share is convertible into 3 shares of common stock 4,130,000
Common stock, $10 par value 6,030,000
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 73,600 shares of common stock at $20 per share.
Instructions
(a) Compute basic earnings per share for 2021.
(b) Compute diluted earnings per share for 2021.

Answer 1

a. Basic EPS = (Net Income - Preferred dividend) / Number of shares for common stock

Basic EPS = ($1,150,000 - (4,130,000*6%) / (6,030,000/$10)

Basic EPS = ($1,150,000 - $247,800) / 603,000

Basic EPS = $902,200 / 603,000

Basic EPS = $1.50

b. Diluted EPS = (Net Income - Preferred dividend) + Interest savings (net of tax) / (Average common shares + Potentially diluted common shares)

Diluted EPS = ($1,150,000 - (4,130,000*6%) + (2,040,000*6%*(1-0.2) / (6,030,000/$10) + (2,040,000/1000 * 30) + (25-20/25 * 73,600)

Diluted EPS = $902200 + $97920 / 603,000 + 61,200 + 14,720

Diluted EPS = $1,000,120 / 678,920

Diluted EPS = $1.47