202589-18-45P

AID: 7725 | 5/06/2015

Calculate the basic EPS as follows:

Basic earnings per share is the amount of a company's profit or loss for a reporting
period that is available to the shares of its common stock that are outstanding during
the reporting period.
It is calculated by dividing net income from the business after extra ordinary items
with the common stock.
Description

Amount $

Net Income
Less: Dividends on cumulative preferred stock
30, 000 $100 0.08
25, 000 $100 0.10
Net income identified with common stock

Amount $
1,985,000

240,000
250,000
1,495,000

Calculate the total number of shares:

Description
Weighted-average number of shares:

Shares

Jan 1 to Oct 1 (320,000 9/12)

Oct 1 to Dec 31 (400,000 3/12)
Total

240,000
100,000
340,000

Calculate the basic EPS:

$1,495,000
340,000
=$4.40

Basic EPS=

Therefore, the Basic EPS is $4.40.

Calculate the diluted EPS as below:
Diluted EPS is a measurement which is used to evaluate the quality of a
company's earnings per share.
Diluted EPS is calculated by the firm's net income divided by the sum of its average
shares and other convertible instruments.
Test for dilution of convertible securities:
Description Net Income Impact
7% Convertible bonds $122,200(1)

Number of Incremental
Shares
EPS
55,000
$2.22

10% Convertible preferred stock $250,000

75,000

$3 33

Effective interest is the amount charged to interest expense, not paid interest.
(1) $2,350, 000 0.08 0.65 $122, 200
They are both potentially dilutive because each security is less than the $4.40 basic
EPS. Whether the securities are actually dilutive depends on the comparison with the
recomputed EPS, as shown below.
Description
Basic EPS

Income
$1,495,000

Shares
340,000

May 1, 2009, options as it is Exercised on May 1, 2009

'Number of shares' Assumed issued is 20,000

'Number of treasuryshares'
{ ( 20, 000 $20) $251} 16, 000

4, 000 8 /12 2, 667

$1, 495, 000 / 342, 667 $4.361

17% Convertible bonds $ 122,200 55,000

$1, 617, 200 / 397, 667 $4.071

10% Convertible preferred
Stock $ 250 000 75,000
Diluted EPS $1,867,200 /472,667= $3.951

Therefore, the diluted EPS is

$3.951

Average EPS
$4.401