EPS Calculations

Solve BOTH EPS (Earnings Per Share) questions below

QUESTION #1) 

Stanley Department Stores reported net income of $720,000 for the year ended December 31,
2021.
Additional Information:
   
 
  Common shares outstanding at Jan. 1, 2021 80,000  
  Incentive stock options (vested in 2020) outstanding throughout 2021 24,000  
  (Each option is exercisable for one common share at an exercise price of
 
$37.50)
 During the year, the market price of Stanley’s common stock averaged $45 per
 
share.
  On Aug. 30 Stanley sold 15,000 common shares.  
  Stanley’s only debt consisted of $50,000 of 10% short term bank notes.  
  The company’s income tax rate is 40%.  

   
Required:
Compute Stanley’s basic and diluted earnings per share for the year ended December 31, 2021
1. Basic EPS
=net income/no. of outstanding shares
No. of outstanding shares = Weighted average of shares
=100,000 * (12/12) = 100,000
On august 30 made sales 15,000 i.e. 15000 * (4/12) =5000
Total = 100,000+5000 = 105,000
Numerator =801,000
Denominator = 105,000
Basic EPS =801,000/105,000 = $7.63
2. Diluted EPS
Proceeds received = 24000* 24 = 576,000
Buyback average market price = 576,000/28.8 = 20,000
Net increase no of shares = 24,000-20,000 = 4,000
Diluted EPS= 801,000/(105,000+4000) = $7.35

QUESTION #2) 

Information from the financial statements of Ames Fabricators, Inc., included the following:

   
  December 31
  

    2021    2020  

  Common shares   100,000    100,000  

  Convertible preferred shares

  12,000    12,000  
      (convertible into 32,000 shares of common)

  10% convertible bonds 1,000,00 1,000,00

$  $  
      (convertible into 30,000 shares of common) 0 0

     Ames’s net income for the year ended December 31, 2021, is $500,000. The income tax rate
is 40%. Ames paid dividends of $5 per share on its preferred stock during 2021.

   

Required:

Compute basic and diluted earnings per share for the year ended December 31, 2021.
 Numerator (Basic EPS): Net income = $500,000; Preferred
dividends = $60,000 ($5 x 12,000 shares)
500,000/100,000 = $5.00
Diluted EPS = ($500,000 - $60,000 + $60,000 + $60,000) ÷ (100,000 + 32,000 + 30,000) =
$560,000 ÷ 162,000 = $3.46 Already computed Basic EPS = ($500,000 - $60,000) ÷ 100,000 =
$4.40