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Ignatius Corporation had 7 million shares of common stock outstanding during the current calendar year. It issued ten thousand $1,000, convertible bonds on January 1. Each bond is convertible into 50 shares of common stock. The bonds were issued at face amount and pay interest quarterly at an annual rate of 10%. On June 30, Ignatius issued 100,000 shares of $100 par 6% cumulative preferred stock. Dividends are declared and paid semiannually. Ignatius has an effective tax rate of 40%. Ignatius would report the following EPS data (rounded) on its net income of $20 million:_________.
Basic Eps - Diluted Eps
a. 2.77 - 2.67
b. 2.81 - 2.71
c. 2.85 - 2.67
d. 2.81 - 2.68

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Answer:

a. 2.77 - 2.67

Explanation:

Basic Earnings Per Share = Earnings Attributable to Holder of Common Stock / Weighted Average Number of Common Shares

                   = ($20,000,000 - $300,000 - $ 1,000,000 ×60%) /7,000,000

                   =  $2.77

Diluted Earnings Per Share = Adjusted Earnings Attributable to Holder of Common Stock / Adjusted Weighted Average Number of Common Shares

                                  = ($20,000,000 - $300,000) /(7,000,000 + 500,000)

                                  =  $2.67

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Answer:

The correct answer is (b)2.81 - 2.71

Explanation:

Solution

Given that:

Compute  basic EPS (Earning per share) is stated as follows:

Basic EPS = Net income - (Preferred dividend)/7,000,000

= $20,000,000 - (100,000 * $100 * 6% * 1/2)/7,000,000

= $2.81

Now, compute diluted EPS as follows:

Diluted EPS =[ net income - preferred dividend + interest cost savings/ average outstanding shares + possible shares

=[ $20,000,000 - (100,000 * $100 * 6% * 1/2) + (10,000 * 1,000 * (1- 40%))]/7,000,000 + (10,000 * 50)

= $2.71

Therefore, Ignatius would report the following EPS data (rounded) on its net income of $20 million as $2.81 - $2.71