Question

"P16.8 (LO 5) (Computation of Basic and Diluted EPS) The information below pertains to Barkley Company for 2021. Net income for the year $1,200,000 7% convertible bonds issued at par ($1,000 per bond); each bond is convertible into 30 shares of common stock 2,000,000 6% convertible, cumulative preferred stock, $100 par value; each share is convertible into 3 shares of common stock 4,000,000 Common stock, $10 par value 6,000,000 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 75,000 shares of common stock at $20 per share. Instructions "

Answer 1

Answer: a) 1.6

b) 1.55

Step-by-step explanation:

a) Basic EPS

Basic EPS is calculated wth the following formula,

= ( Net Income - Preferred Shares)/Weighted Average No. Of Equity (WAES)

Solving for the Variables we have,

Net Income = $1,200,000

Preferred Shares = (4,000,000 * 6%) = $2,400,000

Weighted Average No of Equity shares( common)

= 6,000,000 shares/ $10 par value

= 600,000 shares.

Plugging the figures in we have,

= (1,200,000 - 240,000)/600,000

= 1.6

1.6 is the Basic EPS for 2021

b) Diluted EPS

The formula for Diluted EPS is,

= (( Net Income - Preferred Dividend) + Post Tax Interest ) / WAES + Potentially dilutive common shares

Post Tax Interest is interest net of tax which is,

= 2,000,000 * 7% * ( 1 - 0.4)

= $84,000

Potentially dilutive Common shares consists of the Common stock options and the convertible bonds.

Incremental Shares from options = ((Market Price - Option Price)/Market Price ) * No. Of options.

=( (25 - 20) / 25) * 75,000

= 1/5 * 75,000

= 15,000 shares

Convertible Bonds to shares would be,

= 2,000,000/ 1,000

= 2,000 bonds * 30 per share

= 60,000 shares

Preferred shares are stated to be convertible but are already accounted for in the formula. Converting them again would be Anti-dilutive.

Computing with the calculated figures we have,

= (1,200,000 - 240,000 + 84,000) / 600,000 + 15,000 + 60,000

= 1,044,000/675,000

= 1.546

= 1.55

1.55 is the diluted EPS.